As Indian conglomerates have sprawled across the economy, there has been one long-held regulatory taboo on their operations — owning a bank. Until now, that is.
A Reserve Bank of India working group made an attention-grabbing proposal last month to allow the country’s industrial houses to fulfil long-held aspirations to expand into banking.
It was only in a working paper but it has prompted much consternation, even about the future of Indian democracy. Former RBI governor Raghuram Rajan and an ex-chief economic adviser to prime minister Narendra Modi are among those raising concerns.
Critics have warned the proposal would entrench the historical nexus among the financial system, industrialists and politicians, giving tycoons additional financial clout to play an undue role in everything from the economy to election funding.
India’s conglomerates are a defining feature of the country’s economy. The Tata Group until recently had more than 100 operating companies providing everything from coffee to IT. Reliance Industries and Adani are expanding into a growing range of business areas including telecoms and airports. The concentration of corporate power under Mr Modi has increased, with some fretting that an age of entrepreneurship is giving way to an age of corporations. But one thing Indian conglomerates don’t have are banks.
Arvind Subramanian — who served as Narendra Modi’s chief economic adviser — warned along with two other former officials in an Indian Express article that “a rules-based, well-regulated market economy, as well as democracy itself . . . will be undermined, perhaps critically” if authorities implement the proposal by the RBI working group.
Mr Rajan and a former RBI deputy went further. Such a move “will increase the importance of money power yet more in our politics, and make us more likely to succumb to authoritarian cronyism”, they wrote in a paper.
India’s financial sector is burdened by one of the world’s highest bad-loan ratios. For years, tycoons exploited cosy relationships with politicians to tap state banks for easy credit to fund ventures that collapsed. Lenders have followed, with alarming frequency.
But some in India think officials should rethink their attitude on ownership to address a shortfall in credit. Domestic bank credit to the private sector, at 50 per cent of gross domestic product, is less than half that of Asian countries including China, Korea and Thailand. State-run lenders control two-thirds of banking assets, and the central bank subjects would-be newcomers to onerous tests. Few pass: the RBI has only given out a handful of licences since 2014.
To be sure, the RBI group proposes allowing corporations to own banks only after it beefs up regulatory supervision. But critics argue that the dangers of going down this road outweigh the benefits. They say allowing hungry borrowers to become lenders raises the risk that some tycoons at poorly managed conglomerates will find ways to dip into their own in-house bank or encourage lending to affiliates.
As S&P notes, this would heighten the risk of contagion in the financial sector if a bank found itself in trouble. The losers would be depositors and taxpayers, who would probably have to fund any bailouts. It would also widen the chasm between corporate haves and have-nots. India’s most powerful corporations have gained market share in recent years, muscling aside competitors. Giving them banks could turbocharge their potential power.
Some bank analysts argue that another RBI working group proposal to let well-run non-banking financial companies turn into banks would be a better way of bolstering the banking system, giving the lenders access to deposits and other more reliable sources of funding. They say even though some of the biggest NBFCs such as Bajaj are part of conglomerates, this would pose less risk than allowing corporate newcomers. But whether these NBFCs would even want to is unclear, given the extra regulatory burdens.
Another mooted solution remains off the table for now: privatising some of India’s state banks. Some analysts argue underperformers should be sold off to private sector parties interested in their large branch and customer networks. That could improve allocation of lending if the banks could be turned around with fresh capital and better management. However, privatisation is one taboo that remains.