Is it right time to allow corporates to own banks?

The structure of banking has never remained the same since India became independent, not shy of taking even a 180-degree turn, actually 360-degree too. But there may be a lull for a while.

The largest and the oldest bank which is still in existence is the State Bank of India, which emerged from its roots in the Presidency Banks in Kolkata(1806), Mumbai(1840) and Chennai(1853), via the Imperial Bank of India(1921), and now better known as SBI(1955). In 1960, SBI was given control of eight princely banks in India as associate banks.

In 1969, the Prime Minister of India, Indira Gandhi, took a bold and controversial decision to nationalize 14 major banks, followed by nationalization of 6 more private banks in 1980. These public sector banks along with the big brother, SBI, and its associate banks dominated the banking sector because of their size and wide-spread networks, besides being government owned.

Before long, moves were afloat in early nineties to challenge what was done in 1969. The then government led by Narasimha Rao embarked on a policy of liberalization and began giving banking licenses to private players. The theory of nationalization was consigned to ashes, the Government taking a 180-degree turn. Surviving new banks from that age are IndusInd Bank, ICICI Bank, Axis Bank and HDFC Bank. Later, in the early years of this century, Kotak Bank and Yes Bank got banking licenses, adding more strength to the private sector.

The last fifteen years have seen immense changes in the banking scenario, both by way of consolidation and through new policies. SBI merged its associate banks, State Bank of Saurashtra in 2008 and State Bank of Indore in 2009. The remaining five associate banks headquartered at Jaipur, Hyderabad, Mysore, Patiala, and Thiruvananthapuram along with Bhartiya Manila Bank were merged with SBI by 2017.

In the following two years, more mergers happened in the name of consolidation and most of the surviving banks became bigger. Dena Bank and Vijaya Bank merged with Bank of Baroda, Oriental Bank of Commerce and United Bank of India merged with Punjab National Bank, Syndicate Bank merged with Canara Bank, Andhra Bank and Corporation Bank merged with Union Bank and Allahabad Bank merged with Indian Bank.

The financial sector is now watching developments on two fronts: privatization of public sector banks and more banking licenses to private sector.

The Government seems to have gone cautious after identifying PSBs (Bank of India, Bank of Maharashtra and Overseas Bank) for sale. It wants to dress up PSBs before the sale to get a good value. Transformation plan includes capital support, sale of non-core business and moving stressed assets to the proposed Bad Bank. While Bad Bank is work-in-progress, sale of non-core business is likely to take more time in the background of the deal between PNB Housing Finance and Carlyle attracting SEBI scanner.

Even though PNB is not a part of future steps, this experience has led the government to ask PSBs on likely sale to tick all boxes properly to avoid any future trouble. Banks have been nudged that they should follow all due procedures and seek legal opinion wherever required to avoid regulatory breaches.

Government seems to be waiting also for investor response in the sale of IDBI Bank before taking up PSBs. This will give an opportunity not only to assess the response but evaluate challenges too. The Cabinet Committee on Economic Affairs has approved the proposal for the Government and LIC to sell their entire stakes in IDBI Bank. The Government is currently in the process of deciding on the advisers for the IDBI stake sale.

On private sector front, RBI had opened a window in 2013 and 25 applications were received. The then new Governor of RBI, Raghuram Rajan, felt that the policy was no good and after giving banking licenses to merely two entities - Bandhan Bank and IDFC - abandoned the policy. He introduced the concept of Payment Bank and Small Finance Bank and in all 21 licenses were given in the two categories in 2015.

In 2016, RBI announced guidelines for on-tap licenses for universal banks, applications to be evaluated by a Standing Committee. It took RBI five years to set up the Standing Committee headed by a former RBI Dy Governor, Shyamala Gopinath. RBI has surely sent a signal that they were ready to receive new applications, but no response is visible, especially because of uncertainty on the ownership by corporate houses.

RBI had set up an internal working group (IWG) to review corporate structure of private sector banks. In its 2020 report, the IWG has suggested sweeping changes in bank ownership, including allowing large corporate and industrial houses to convert their NBFCs or own new universal banks by amending the Banking Regulations Act, 1949. If the recommendations are accepted, this will mark the re-entry of India Inc into commercial banking, four decades after the last round of nationalization.

While Industrialist Mukesh Ambani has banking ambition for sure, having set up the Jio Bank as a Payment Bank with SBI, the RBI can ill-afford to take corporate houses on board unless strong ring fencing for business interest are defined and introduced as a part of the new policy. There are arguments that banks led by corporate houses may divert funds through loans to related-party businesses.

With the above constraints, challenges, and uncertainties, we may have to wait for some time before we see the next major phase of changes in Indian banking structure, other than the Bad Bank and IDBI stake sale. Having said that, it must be added that a lot has happened in recent years and giving some time for stabilization may not be a bad idea.

(The author is an ex Managing

Director of SBBJ (SBI Group))