Signalling a marked shift in approach, the Reserve Bank of India’s internal working group has proposed to allow large corporate and industrial houses to promote private banks. The report also makes a case for considering well-run, large non-banking finance companies (NBFCs), with an asset size of Rs 50,000 crore or above, for conversion into banks, subject to completion of 10 years of operations. Earlier, during issuance of licences, preference was given to financial institutions which had experience in banking transactions. Since liberalisation, bank licences have been given in three rounds. Ten banks got it in 1993-94, two in 2003-04, and an additional two in 2014. The recommended changes — which seek to bring clarity on capital norms and ownership guidelines — can take place only after amendments to the Banking Regulation Act, 1949. The RBI has sought comments on the draft report by January 15.
The banking landscape in the country is clearly set for a big change. Permission to large industrial houses to convert their NBFCs to full-scale banks will make them bigger than many mid-sized banks. The move could address the risk posed by large non-bank lenders whose growth goes unchecked, as experienced in the IL&FS and DHFL debacle. A fresh wave of consolidation in the banking sector could also be on the cards. The suggestion that payments banks can convert into small finance banks after three years of operations can potentially benefit Paytm, Jio and Airtel.
Do the recommendations augur well for the customer? Time will tell. Given the rise in bank failures and the trust deficit when it comes to lenders dealing with defaulting big guns, the regulator will have to be more than careful in distributing bank licences. The significant shift in the ownership structure of private sector banks would invite concerns of taking the sector into the brazen territory of crony capitalism, and that can only be addressed through stricter regulatory monitoring and by strengthening the supervisory mechanism.