2014: Banking in India will change—body and soul--LiveMint
While new banks will rewrite the rules of the game, RBI’s initiative to clean up bad loans will add strength to the banking system
To use a cliché, there will be a tectonic shift in the Indian banking landscape in 2014. Both the body and the soul of the Rs.80 trillion banking industry will change. A set of new banks will get the regulator’s approval, some foreign banks operating in India may decide in favour of local incorporation to get near-national treatment, and new norms for early recognition of financial distress and faster resolution and recovery will help curb rising bad assets and improve the health of the banking system.
As an offshoot, Indian firms, especially those operating in the infrastructure space and adding to the growing pile of bad loans at banks, will become more aggressive in selling assets to shrink debt. In 2013, close to a dozen Indian companies either sold or made their intention clear to sell assets, to pare at least Rs.3.5 trillion worth of debt, as rising interest costs and diminishing margins took their toll on growth. This trend will inten♠sify in 2014.
Reserve Bank of India (RBI) governor Raghuram Rajan, a former chief economist with the International Monetary Fund (IMF), has been talking about offering banking licences on tap. This might happen in the future, but, until now, this has been a once-in-a-decade phenomenon. Following the nationalization of 14 large banks in 1969 and six in 1980, RBI has so far given licences to only 12 banks in two phases, including the conversion of a cooperative bank into a commercial bank. In the first round, the banking regulator issued licences to 10 private sector banks in 1994, shortly after the nation embraced economic liberalization under the P.V. Narasimha Rao-led Congress government. In the second round, licences were issued to two banks—Yes Bank Ltd and Kotak Mahindra Bank Ltd—in 2004.
In the past, RBI’s stated objective behind giving licences to new banks was to introduce competition in the sector, largely dominated by government-owned banks. This time, the prime focus is to promote so-called financial inclusion, or increasing the reach of financial services to the unbanked population. Then finance minister Pranab Mukherjee, in his February 2010 budget speech, had announced that RBI would open up the sector and issue fresh licences with the objective of spreading banking services wider in a nation where roughly 50% of the adult population does not have access to them. After issuing a discussion paper and receiving public feedback on it, RBI issued the guidelines on new banking licence in February 2013 and set a 1 July deadline for applications. A panel of four, headed by former RBI governor Bimal Jalan, has been scrutinizing the applications.
IMF’s financial access survey of 2011 gives us a fair idea about how critical financial inclusion is in India. In every 1,000km stretch, India has 30.43 bank branches and 25.43 automated teller machines (ATMs). In contrast, China has 1,428.98 branches and 2,975.05 ATMs. Similarly, there are 10.64 bank branches and 8.9 ATMs for every 100,000 of the population in India. The comparable figures for China are 23.81 and 49.56. Finally, bank deposits in India constitute 68.43% of the nation’s gross domestic product (GDP) and credit 51.75% against China’s 433.96% and 287.89%, respectively. To expand banking services in a nation of 1.2 billion people, one needs deep-pocketed promoters, and this is why corporations have been allowed to apply for banking licences, but not too many of them seem to be interested.
The Tata group withdrew its application for a banking licence, leaving 25 applicants in the race and only three of them belong to the corporate sector—the Aditya Birla Group, the Bajaj Group and Anil Ambani’s Reliance Group. Tata is not the first business house to have a change of heart. The Mahindra and Mahindra Group, too, decided not to apply for a banking licence, saying RBI’s norms were not conducive for large and successful non-banking financial companies to turn into banks.
According to the licensing norms, the new bank will have to be listed within three years, bringing down the promoters’ shareholding to 40%. Within 10 years, this holding must be further pared to 20%, and by the 12th year to 15%. This is a big deterrent as the promoters will not be able to reap the benefits of the value they create. How many licences will be given is anybody’s guess at this point, but one thing is for sure: armed with technology, the new banks will shift the playing field from the cities to rural India and add a new dimension to the rural consumption story.
At a parallel level, some old and big foreign lenders may set up wholly owned subsidiaries in India because they will get “near national” treatment by the regulator when it comes to opening branches. Foreign banks with “complex structures” and banks that do not provide “adequate disclosure” in their home jurisdiction as well as “systemically important” ones will have to convert their local units into subsidiaries. Systemically important banks are those whose assets account for at least 0.25% of the total assets of all commercial banks. At least 12 foreign banks, including Bank of America Corp., Barclays Plc, Citibank NA, Deutsche Bank AG, Hong and Shanghai Banking Corp. Ltd, DBS Bank Ltd and Standard Chartered Plc, fall into this category. Those banks that started operations in India before August 2010, however, have the option to continue their business through the branch mode, but they will be “incentivized” to follow the local incorporation route. One of the incentives is allowing foreign banks to buy private sector banks in India. If indeed that happens, banking will never be the same in India.
While new banks and locally incorporated foreign banks will rewrite the rules of the game, RBI’s initiative to clean up bad loans will add strength to the banking system. The combination of bad and restructured loans is at least 10% of total banking assets in India. The new norms will give incentives to banks to detect the first sign of a loan turning bad and take remedial steps and, at the same time, they will make life difficult for rogue borrowers. At the next stage, RBI will probably focus on reforming state-run banks that account for about 70% of banking assets, but lack the skill to manage them and aren’t smart enough to say no when it comes to taking exposure to some sectors. Overall, 2014 will be action-packed; banks cannot ask for a more exciting time.
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