Tread warily on new private banks

Posted on August 19, 2010 | Author: T T Ram Mohan | View 1949 | Comment : 17

The RBI must first address the limits on promoter holding of equity in a bank to attract industrial houses into banking.Stringent limits on the promoter’s share of equity may not be the best means of restricting control.Restrictions on control by promoters are better exercised by managing the composition of the board.

artical Picture Is it time to let industrial houses into banking? This is by far the most important question raised in the RBI discussion paper on entry of new banks in the private sector. Industrial houses will not be interested unless they can hold a substantial portion of equity. So the RBI must first address another issue flagged in the paper, namely, the limits on promoter holding of equity in a bank.
Under the present norms, promoters are required to hold 40% of paid up capital at the time of issue of a bank licence with a lock-in period of five years. Thereafter, promoters are required to dilute their holding to 10% over a suitable time frame.
Promoters may be permitted to hold up to 30% of a bank’s equity subject to their meeting ‘fit and proper’ criteria. In practice, not many promoters have qualified.
Some relaxation in these norms is required if industrial houses are to be attracted into banking. Most industrial houses like to own equity of at least 30-40% in their enterprises. Even non-industrial promoters with deep pockets will not find the present dispensation attractive.

They are expected to bear a big chunk of the risk at the start-up stage. When the bank has grown bigger, they are expected to reduce their stake to 10%. What serious promoter would be interested? Only promoters with shallow pockets, such as professionals, would. As the RBI paper underlines, the record of professionals who set up banks is uninspiring.
An increase in promoter holding to 20% is one of the options proposed. This appears reasonable. It is large enough to sustain the promoter’s interest without leading to concentration of shareholding in a bank. It may also be large enough to interest industrial houses.
The intention in keeping promoter stake in a bank down to 10% is to ensure that the promoter does not exercise control. But stringent limits on the promoter’s share of equity may not be the best means of restricting control.

In the non-financial sectors in India, we have promoters controlling enterprises with an equity stake of less than 10%. Restrictions on control are better exercised by managing the composition of the board.
Promoters or management should not be allowed to choose more than 50% of independent directors. The rest of the independent directors should be nominees of institutional investors, minority shareholders and employees. Then we will have a truly broadbased board, one where at least some ‘independent’ directors are truly independent of management.

The entire corporate world badly needs this piece of reform because directors cannot be independent as long as they are beholden to management or promoters. The RBI has an opportunity to strike a decisive blow for governance by introducing this reform in private sector banks.
Suppose we settle for a promoter shareholding of 20%. Should we take the next step and let in industrial houses? In 2006, the second Tarapore committee favoured letting in industrial houses but this was meant to create strong Indian entities in banking before foreign banks were allowed to enter in a bigger way in 2009.
This particular argument does not hold as we have not seen any liberalisation of policy towards foreign banks and are unlikely to see one in the near future. In 2008, the Raghuram Rajan committee opined that it was “premature” to allow industrial houses to own banks and it cited the prohibition on the “banking and commerce” combine that still obtains in the US.

The RBI paper cites a number of concerns on the subject: intra-group lending and other conflicts of interest; difficulties in supervising and monitoring such entities; the undermining of confidence in a bank should something go wrong anywhere in the industrial house, etc.
It proposes several safeguards to address downside risks but these may not work. Industrial houses could be asked to obtain clearances from various investigative agencies (alas, not too difficult to manage in our political system).

Whether ownership is separated from management could be verified (rare in Indian industrial houses). Industrial houses could be barred from using their brand name or logo (but this could defeat the very purpose of letting them in).
The RBI proposes that industrial houses make a start by taking over regional rural banks. Given the state of the RRBs, industrial houses may not find the prospect appetising. They should be free to set up new banks exclusively in rural areas. This would help address the primary objective of licensing new private banks, namely, greater inclusion.
The banks would not be very large given that the big deposits are in the urban areas, hence systemic risk would be manageable. The industrial houses’ capacity for innovation and staying power would be tested.

The regulator would have a chance to monitor governance and put in place mechanisms for supervision. We need new private banks alright but caution must be the watchword in licensing these.

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Comments (17)

  • The common man of the country was not happy with the operations of private sector commercial banks in the country. This feeling was reflected in nationalisation of major commercial banks in 1969 . The government's move was widely welcomed and cheered by the people throughout the country . Private sector banks owned by industrial houses mobilised savings of the nation at cheap rates for indiscriminate use and investment by the industrial houses . These banks completely neglected rural and semi-urban centres in the country . Small farmers , hawkers , petty traders and other socially and economically backward people did not get any financial assistance from these banks . Even the existing private sector banks mainly serve big industries , capitalists , upper class . They have not ...See More

    Posted by N.H.Siddiqui | 21 Aug, 2010

  • All the Banks which were Nationalized during Madam Indira Gandhi's regime belonged to the then Industrial Houses, so long the Banks were fully under their control the Private sector had a commendable growth. Both the Industry and the Banking sector flourished together gleefully. Had that contribution not been there then to days our boasting about GDP would have been in complete non entity. We should not start with a prism that the Industry Houses are corrupt. The Corruption has crept in to the society and our real life by the courtesy of the Few Political Leaders who have joined the Politicis only to amaz money by corrupt means, as if the Licence of corruption has been given to them by the General Public of India by selecting them as the Member of the Legislative Assembly and as Members ...See More

    Posted by Professor S. Durgaaprosad , Principal at Lakshya Institute of Management Studies. | 21 Aug, 2010

  • Income Tax Dept raids Axis Bank Jabalpur Branch for Fraudlent Account in the name of Narmada Vikas Pariyojna with 50 crores balances and opened without any KYC for more details click the following link or watch NDTV India Hindi News. Is the

    Posted by SANJAY PRABHU , PRESIDENT at Private Bank Employees & Investors Protection Forum | 20 Aug, 2010

  • Our banking sysytem has grown from strength to strength without industrial houses running them. What great expertise these houses possess to run the banks that FI/banks in this country do not have? The present ownership rules have ensured that no entity could dominate the Bank Boards and they are run professionally. There is no need to bring in the industrial houses or change the ownership norms at this juncture.

    Posted by nv subramanian | 20 Aug, 2010

  • Income Tax Dept raids Axis Bank Jabalpur Branch for Fraudlent Account in the name of Narmada Vikas Pariyojna with 50 crores balances and opened without any KYC for more details click the following link or watch NDTV India Hindi News

    Posted by SANJAY PRABHU , PRESIDENT at Private Bank Employees & Investors Protection Forum | 20 Aug, 2010

  • I accepted Mr.Sanjay prabhu View. Bank privatisation , it is against to Congressleader cum our former prime minister Indira gandhi policy .Then, the private banks are have not service MInd. All are have money i.e. profit intention. Because, they are resondibilites to share holder. Our country is an 80% Agriculture country.20 % . Most of Banks are not lending loan to farmers. The private banks i.e. ICICI , HDFC. how much money lending to agriculture industry.And then which private bank has establish their branches at rural area. Establishment of Private banks are ,no way usefull to downdrodeen people for up list their life. THe private banks are service to 20% not for 80%. Then function of Private banks are already comment by Apex court pertaining to recovery procedure. In so many ...See More

    Posted by kumaresanvelu | 20 Aug, 2010

  • Yes, india has a lot of banking space, wherein the corporate houses can fill in. However, considering our past experince in dealing with these private banks run by corporate houses, RBI needs to trade with a lot of caution. The RBI proposition of allowing corporate houses to take over the existing RRBs is better suggestion. The promoters equity holding can also be allowed upto 20% but with limited(say 10%) voting rights. Dealing with corporate houses require a very vigilant regulator. The way we have faced issues like connected lendings, lending to relatives, friends, acquiring stakes through proxies, entering into sensiting sectors without proper risk managemnt etc can only be monitored by ever-vigilant regulator-supervisor. The fact is once you give license to a corporate house, they ...See More

    Posted by manoj kumar,Financial Specialist at Central Bank of Bahrain|20 Aug, 2010

  • Privatization of Bank has been already allowed. So, Industrial houses are indirectly controlling banking industry via good relations or indirect stakes. The question remains, should they be allowed to control this industry directly? Special controlling panel monitoring on % of individual and groups on the industry as a whole and giving them a power to sanction each transfer of shares, may establish healthy freedom for banking industry. This practice may avoid monopoly on financial sector of India.

    Posted by Deepali Dande , Financial Analyst at Independent | 20 Aug, 2010


    Posted by TV KRISHNAMURTHY | 20 Aug, 2010

  • Check out the status of RRB & Co-operative Bank? RBI should do the off-site surveillance, by giving them free banking software and charge them some small amounts on monthly basis. For this purpose they should tie up finacle of infosys and this should be made compulsory for every bank, so that they too can be brought in par with private sector bank.

    Posted by M PARRIKAR , OFFICER at XYZ | 20 Aug, 2010

  • We have more than sufficient Private & Nationalized Bank in Metros, Urban, Semi-Urban cities and leaving top 4 to 5 banks in each category, others bank branches do not have sufficient business and their most of the branches are not in position to break even, and if we give more licenses to new banks then it will increase the unnecessary cost and the ultimate burden will have to be borne by the Investors only and hence we do not see any requirement of new Private Banks in to the systems.

    But Yes in Rural areas we require more banks in order uplift the underprivileged, but this job of financial inclusion can be best done either by the nationalized banks or the post office, and if the regulatory authority (RA) is looking forward to bring in more private sector banks by giving ...See More

    Posted by SANJAY PRABHU , PRESIDENT at Private Bank Employees & Investors Protection Forum | 20 Aug, 2010

  • Allowing big Industrial Houses in Banking Sector is well planned move of industrial houses to get rid of financial discipline of PSB and take benifit of low cost funds mobilsed through banking system . We have already seen the working of GTB, CRB, NBFCs and small New Generation Private banks merged with other Banks. Most of the Bankers have experienced that Large Corporates want credit apprisal from PSB and later on moved to route of CP and credit fcaility at sub PLR without adequate collaterals.

    Posted by J B Parmar | 19 Aug, 2010

  • There is no harm to permit industrial house in banking sector, the well managed industrial house will bring better administrative expertise and modern facilities/technology in banking industry, with certain restriction on there holding, self/group financing, dealing in their own/group equity. Capital requirement should also be more for industrial house sponsored banks as they will not prefer to go in semi urban and rural places. The fear of self and group financing does not cary value we should be little practical. A well managed industrial house gets all their financial requirement from any bank easily. Take example of Tata motors Mamta dedi did not allow them in west Bengal there after how many states approached them similar is case in banking industry well managed group need not ...See More

    Posted by PARSO SUKHEJA,ADVOCATE at PENSIONER|19 Aug, 2010

  • Before issuing any more licences to the NBFC & Industrial/Business houses, let us go through the ground realities from different angles as an Investor, Depositor & as a Regulator of the Republic Citizens of India and then let us come to an debatable conclusion if India really requires new faces of private banks and if answer is really YES then let us first answer some questions i.e. whether the existing regulator has enough capacity to monitor those new faces? Whether the regulator was successful in the past in monitoring the existing banks? Where is the accountability of the regulator & the promoters in monitoring those sunk ships like GTB and various NBFCs like CRB, Lloyds etc ? Is our Regulator known for giving clean chits?. How does RBI monitor those mushrooming Microfinance companies ...See More

    Posted by SANJAY PRABHU , PRESIDENT at Private Bank Employees & Investors Protection Forum | 19 Aug, 2010

  • The banks promoted by Big Industrial Houses will put up us back to Square One for which purpose the 28 PSBs were Nationalised in 1969 and which gave tremendus thrust in the rural sector development. This was one of the main reason in 1999-00, we could survive in economic slow down. For such banks irrespective of Midcap/Largecap and RBI guidelines, the large credit limits will go to them or their cartel under give and take policy. During 1991-97 I my self observed the number of big NBFCs were involved in high risk area, hardly any of them is surviving, number of banks still have large NPAs of these NBFCs. The only Kotak Mahindra Finance was converted to a Pvt Sector Bank. Keeping in view the large population and social resposibilities of the Govt/RBI the entire banking sector should be ...See More

    Posted by C.S Maurya | 19 Aug, 2010

  • If directors are to be truly independent then the promoters or management must not be allowed to choose them. There must necessarily be a cap on the number of directors who are to represent the promoters and/or management on the Board. The others who must at least be twice as that of the Promoters' directors must all be independent who have no links with the promoters or management, in what so ever manner. The RBI should certainly do well in striking a decisive blow for corporate governance by bringing in this most needed reform in respect of composition of Board of Directors of banks. There need not be harsh restrictions placed on promoters' stake in new banks, so as to make it restrictive and unattractive to corporate and industrial houses. The big industrial houses and business ...See More

    Posted by Sooraj Kumar,|19 Aug, 2010

  • India needs more Banks for the purpose of increasing penetration as well as providing capital for Investmentment. Issuing new Banking Licenses would have far reaching impacts in the long run when the size of these new entrants would signigicantly increase. Giving Banking Licenses to Industrial houses or the established Financial Services players are the only option before the RBI. These Banks would need large capital once they are streamlined which may take 7 - 10 years. If Promoters would not hold significant stake at that stage then the Bank would face difficulty in raising large capital when it would be needed most. Otherwise, there would again be consolidation like Bank of Punjab and Centurion Bank. Hence, it is necessary that RBI allows higher Promoters holding for atleast 10 years ...See More

    Posted by Saket Jain,AVP - Corporate Finance at Ruia Group, Kolkata|19 Aug, 2010

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