1 CBROA News JULY 2021 The General Secretary writes . ALLOWING CORPORATE HOUSES TO SET UP BANKS Dear Friends, given permission to set up An internal working group set up by the Banks, the report notes. It RBI has recommended that large Corporate or is reported that none of the corporate applicants Industrial Houses may be allowed to set up A N Krishna Murthy cleared the criteria set by Banks. General Secretary the RBI. A large Corporate Industrial Business House in this context means, a group having The Working Group in its report noted total assets of Rs.50,000 crore or more, where that allowing large companies to promote a the non-financial business of the group ac- bank, heightens the risk of misallocation of counts for more than 40% in terms of total as- credit, connected lending, extensive anti- sets or gross income. competitive practices and exposure of the Government safety net established for Bank- The working group report notes that the ing to a broad image of risks emanating from RBI has always been cautious of the serious commercial sectors of the economy. risks, governance concerns, and conflicts of interest that could arise when Banks are On the other side, the Working Group owned and controlled by large Corporate and report notes that large Corporate Houses can Industrial Houses. be an important source of capital and can bring in their experience, management exper- In 2013 when RBI announced that it tise and strategic direction to Banking. It is al- would be issuing new universal bank licences, so a fact that many of them have been suc- it had decided to allow corporate entities to cessfully operating in other financial seg- apply. Certain large Corporates applied for a ments. The group also noted that, internation- licence under this new policy of which few en- ally there are very few jurisdictions which ex- tities withdrew their applications. Eventually plicitly disallow large corporate houses and only IDFC Bank Ltd, and Bandhan Bank Ltd, even in these jurisdictions, it is not a settled both from the financial services sector, were issue. Monthly E Bulletin of Canara Bank Retired Officers’ Association (Regd) - For Internal Circulation Only 2 ALLOWING CORPORATE HOUSES TO SET UP BANKS Thus the working group noted that, while banks is fraught with risk. The thought that large Corporate Houses may be allowed to large business houses could own and run enter Banking, a cautious approach involving banks is worrying. Given how so many of In- better legal and supervisory infrastructure dia's industrialists have not exactly covered would be essential. themselves with glory and don't trouble them- Recently RBI has released the report of selves unduly about ethics or corporate gov- the internal Working Group set up to review ernance, it is disconcerting to think they would extant ownership guidelines and Corporate be controlling large sums of public money. structure for Indian Private Sector Banks, and Much of the loan assets at our Banks, of the report recommends that promoters be al- at least Rs 15 to Rs.20 lakh crore over the lowed to increase their stake to 26%. The ra- past decade, if not more - are the result of de- tionale for permitting higher share holding of faults by companies and a good part of this is upto 26% of the paid up, voting equity share wilful defaults. At one point Corporate Loan capital is that it will enable promoters to infuse losses accounted for 15 to 16% of the assets. more funds, critical for expansion of Banks, as To be sure, not all of the defaulting companies a cushion to rescue the bank in times of dis- belonged to big industrial groups, but many tress / cyclical down-turn. The dominating log- did. As the Indian Bankruptcy Code (IBC) pro- ic behind such a regulatory line was the re- cess showed, there were groups that owed duction of governance risk and ultimately banks Rs.45,000 crore or more and simply making the depositor's money more safe and did not pay up. secure. Again it is not as though smaller promot- This is expected to increase competition ers have behaved any better, the extent of al- among the Banks. If we analyse the perfor- leged fraud at a YES Bank, a DHFL and an mance of private sector banks in India, we IL&FS is astounding. For every success like would find that Banks with relatively higher an HDFC Bank or a Kotak Mahindra Bank, the stakes of promoters, are performing better financial landscape is blotted by big failures than the diversified ones, with the exception of like Centurion Bank of Punjab, Global Trust HDFC Bank, Kotak Mahindra Bank and Bank, Bank of Rajasthan, Times Bank, Punjab Bandhan Bank which have a better return on & Maharashtra Co-operative Bank and most assets, net NPAs return on equity, net interest recently, Lakshmi Vilas Bank. Again most of income as a percentage of operating income our Public Sector Banks would have become and are performing significantly better than insolvent had it not been for the government's other private sector banks with diversified rescue efforts; about a dozen of them needed holding. to be placed under a Corrective Action Plan and stopped from lending. However the ability But allowing business houses to own of a big Corporate Bank to grab a dispropor- Monthly E Bulletin of Canara Bank Retired Officers’ Association (Regd) - For Internal Circulation Only 3 ALLOWING CORPORATE HOUSES TO SET UP BANKS tionate share of the market for deposits and the Banks remain solvent and that at all times, also misuse or mislay money is high. There they present a true balance sheet. However, would always be the temptation to lend to unfortunately it has failed which is evident group companies regardless of the risk. Con- from the collapse of YES Bank, where it sequently such players make the system should have kept a closer watch. more vulnerable to instability. It is ironical and baffling that the RBI has The Group has also recommended that recommended the move, even after its own NBFCs with assets of more than Rs 50,000 Internal working Group " found out from its set crore and with requisite due diligence exer- of experts that barring one, all of them were of cise, should be allowed to convert themselves the opinion that large corporate/industrial into Banks. Apparently, this does not seem houses should not be allowed to promote a like a bad idea, since bringing NBFCs under Bank." Many experts including former Gover- RBI's oversight would ensure, they are more nor RBI, Sri Raghuram Rajan, former Deputy strictly monitored. After all they have a proven Governor, RBI, Sri Viral Acharya, have not track record and are already operating in the welcomed this move. Hemendra Hazari, a Financial Services space, even if not all of well known SEBI research analyst , wrote in them access retail deposits. However, it is ap- an article titled, "RBI's working group recom- prehended that letting NBFCs become banks mends foxes be put in charge of chicken co- is simply giving Corporates backdoor entry. ops" : "Even under the existing financial re- Though the NBFCs have played a big role in gime, the RBI was unable to detect at an ear- disseminating credit and reaching out to cus- ly stage the connected lending which felled tomers who otherwise do not have access to large regulated financial entities like IL&FS, organised loans. YES Bank, Punjab & Maharashtra Co- opera- tive Bank and DHFL. Will it be able to effec- But unfortunately supervision is weak and no matter how many checks and balanc- tively regulate and monitor large, complex in- es are put in place the system could be dustrial houses which are well versed in dis- gamed, particularly since some groups have guising financial transactions through a vast strong political connections. While the respon- web of opaque domestic and foreign based sibility to prevent frauds and defaults lies with entities?" In a blistering critique in Bloomberg the Bankers, it is also true that RBI's supervi- titled, " India's Banking tiles need to close sion has not been up to the mark. door to tycoon cronyism", renowned analyst, Andy Mukherjee wrote : "From telecommuni- If banks were facing political pressure cations to transportation, India's business which very often they were, RBI should have landscape is already starting to resemble a tightened the lending and Prudential norms to Monopoly Board." protect the Banks. RBI's job is to ensure that It gives an impression that the RBI is Monthly E Bulletin of Canara Bank Retired Officers’ Association (Regd) - For Internal Circulation Only 4 ALLOWING CORPORATE HOUSES TO SET UP BANKS overlooking time-tested principles and limits of Private Sector Banks that are owned by disallowing mega business houses from pro- oligarchs and business tycoons in cahoots moting and owning banks. History is replete with politicians will be rapacious beings. with evidence of business barons who were We wish all our members and the mem- good when they started out only to eventually bers of their families a healthy, happy, joyous morph into robber barons who not only en- time during these hard times afflicted by Coro- riched themselves owing to their enormous na. Stay Safe. Stay Home. Stay healthy. wealth and nexus with politicians in power, but also crushed competition. It will be too naive to believe that a bank owned by a corporate A N Krishna Murthy. Bengaluru house will permit lending to its competitors. General Secretary. 01.07.2021 THE ART OF MINDFULNESS The world has changed upside down! this silence within Self-care has never been more important as is to follow the part of a strategy to manage the ongoing practice of mindful- stress of the Covid-19 pandemic.