Sucheta Dalal :More bank licenses.. Boom to Bust?
Sucheta Dalal

Click here for FREE MEMBERSHIP to Moneylife Foundation which entitles you to:
• Access to information on investment issues

• Invitations to attend free workshops on financial literacy
• Grievance redressal


You are here: Home » What's New » More bank licenses.. Boom to Bust?
                       Previous           Next

More bank licenses.. Boom to Bust?   

March 1, 2010

The Budget talks about re-opening the window for letting more private banks in play. Most market participants and commentators have welcomed the move. I have some reservations on this. Of the many hopefuls who the market thinks should be interested, how many are fit to run a bank ethically and professionally without a conflict of interest? Very few names will actually pass muster. Reading the market commentaries, I shudder when I see some names being put forward. Especially in the context of the fact that the Reserve Bank of India never lets any bank go bust, but encourages bank delinquencies by arranging for subsequent adoption and marriage.

If market gossip is to be believed, a couple of industrial houses already own substantial stakes in a couple of small private banks. While the shareholding is not fully transparent yet, management control is apparently with the hidden owners. The informed gossip is that this Budget has re-opened the window of giving more licenses—specially to enable these houses to legitimise their holdings.

India is a large country. Every bank does not have to be pan-India in nature. The regional banks can thrive. It may be a good idea for the government to actually permit takeover of such regional banks by foreign banks, with the proviso that they have to remain listed entities. This would enable infusion of capital and technology into these banks and also increase domestic shareholder wealth. Let the government permit one or two banks in each region to be acquired by foreign banks like HSBC or Standard Chartered. They can increase their coverage and the regional banks can benefit with better management and technology.

The PSU banks are surely headed for disaster. It is a matter of time. Consolidation or mergers between two bad apples will not produce one good apple. Also, I have always maintained the view that creating a large balance sheet merely by merger, will not lead to credit expansion. A better idea would be to offer PSU banks to be taken over by larger private banks or foreign banks. That can enhance the quality of the banking sector and also stem the rot of poor quality lending from domestic banks. Of course, the government will not permit this, since it would mean an end to the business of loan melas and loan-waiver melas. The political agenda of the government is systematically destroying the fabric of banking.  Look at the latest attempt by the government to define the lending rate. It is ludicrous and whilst every PSU banker talks against it in private, none have the gumption to even write a ‘letter to the editor’.

Coming back to the Budget, the move to permit more private licenses is being seen by a few as a resumption of economic liberalisation. I hope they are right. To me, it seems more a case of political expediency to accommodate a few. In the process, a few bad banks will get created and will have to be bailed out in the future. The other favourable spin-off is that more private banks will bring in lots more FDI (if foreign investment is liberally permitted) and FII investments, which is always good for the markets.
— R. Balakrishnan

-- Sucheta Dalal