THE NEW BANKING LICENSE DILEMMA!!!

When erstwhile finance minister Pranab Mukherjee brought in the idea of issuing new banking licenses in his budget speech for the financial year 2010- 11, the basic idea behind the same was higher financial inclusion. Interestingly, it was the same ‘greater cause’ that drove RBI to issue licenses to 10 new private banks in 1993 and 2 more in 2001 with revised guidelines. But did we get any benefit out of it?

As we had analyzed in one of the cover stories a few months ago, this strategy never worked. Even after a decade and half, and a plethora of tall claims on rural strategies, only 6.5% of these banks’ (new private banks) branches are present in rural areas, (whereas the same stands at 32.7% for State Bank of India and the average for nationalized banks is at 31.7%). The viability of the strategy to achieve the desired goal is certainly a big question mark. In fact, it is further dented by the fact that as the new private banks are growing older, their focus is increasingly shifting away from rural India to higher profit bearing non-traditional banking services in the urban area. As a result, the share of rural deposits and advances in their books has already come down from 10.8% and 8.4% in March 2006 to 9.2% and 7.5% in March 2010 respectively. So what kind of financial inclusion are we looking at now by issuing new banking licenses?

On the other hand, this move will end up crowding the Indian banking arena with a number of small banks. And considering the small capital base of these new banks, their focus will remain mostly on more profit making through retail lending. If that is the target, then we already have a large pool of NBFCs for that purpose. What India needs at present is a strong banking industry with large banks that can play an active role in project financing and provide the much desired boost to industries. But as it can be seen, it’s the PSU banks alone who are active in this arena taking the long-term risk, while the private banks, especially the smaller ones, are more concerned about retail lending and selling non-banking products like mutual funds and insurance. Funding of telecom companies for 2G licenses was an example in this direction. PSU banks’ total exposure here was over Rs.140 billion, while the same for private banks were a lot lesser.

Keeping these things in mind, it’s time to understand that issuing new licenses are not going to help the country by any means. But if it has to be done, then the RBI must include a few compulsory clauses in its guidelines to force the new banks to have sufficient presence in rural India to ensure a material impact on financial inclusion. At the same time these banks must also be forced to divert a particular portion of their lending towards project financing. Without these, creating new banks will be just like changing the NBFC tag of a few entities without any substantial impact on the existing situation.

IT’S TIME FOR THE ROC TO RISE AS A VIGILANT REGULATOR

Under the prevailing cloud of allegations about corporate frauds, I vividly recall a cover story that we did in this publication almost 18 months back (Statutory Compliance – A big joke, BFM May, 2011). Therein we analysed how the Registrar of Companies needed to act like a vigilant watchdog rather than being a toothless facilitator helping companies to get away with all sorts of corporate governance lapses. We further argued that such a passive approach on part of the RoC was allowing creation of dubious corporate structures providing a perfect recipe for the generation of black money.

There is no doubt that with 721,719 companies already registered (as on March 31, 2011) with the RoC and the number increasing by close to a lakh per year (in FY 2011), the task is daunting. But all it needs is a strong bureaucratic will to manage this menace. RoC is the first touch point for all companies when it comes to due diligence in cross checking the details submitted by the promoters. All it really takes is an initial physical verification of the addresses provided. It could be as simple as the physical address verification exercise undertaken by mobile service providers when we buy a sim card. This basic procedure has the potential of saving the nation from spectacular shocks in later days.

Moreover, RoC needs to be more efficient and techno-savvy to make the huge task a bit relaxing. For example, keeping a track of who is a director in how many companies is not an easy task. But technology can come in great use here. RoC can put up a system through which an individual’s details as a director are automatically fed into the records of RoC. This can be done by allotting an id unique to that director, linking back all his details to this single reference point. Every time an application is submitted for a director’s enrollment in a different company, the software would be able to pull up all archived data linked to this id. This will help the RoC keep track of companies and people, which under the current setup is a great challenge.

Moreover, the RoC also has to use a strong hand in ensuring the fact that companies do follow the rules strictly when it comes to filing their annual submissions with the regulator. Because late or irregular filing allow the companies who intend to indulge in frauds the much desired time frame to cover up their crimes and then get away with the regulatory requirements by paying a miniscule late fee and filing their documents. For a country that ranks 20 in terms of Corporate Governance (in a list of 38 countries, survey conducted by GMI ratings), and 75% of it’s top corporate executives agree in a survey that corporate fraud is on a rise (KPMG India Fraud Survey, 2010), these lapses are some serious trouble and must be taken care of on a serious note.

It’s time when the RoC rises from being a mere book keeper to an aggressive regulator in terms of attitude. Looking at the burgeoning size of India Inc. the sooner RoC understands this, the better it is for India.