A working group constituted by the banking regulator Reserve Bank of India (RBI) has suggested what to do with the ownership of private sector banks. It states that large industrial houses may be allowed to share control, but this should only happen after strengthening regulations and supervision to deal with the problem of “connected lending”. That is the issue of diverting depositors money to their other business.
Entry way from backdoor in terms
From the conditions laid down in the recommendation, it is not likely that the regulator will soon reverse its policy of keeping households away from banking. But the report may open the way for backdoor entry. Large groups may acquire non-banking finance companies (NBFCs), which may be allowed to convert into banks. After Corona, the financial system for money can be snatched away from the government authority and go into the hands of the big private rich.
Asian Financial Crisis of 1997–98
A warning has been hidden in the Asian financial crisis of 1997–98. The uncontrolled transaction of financial and non-financial activities within a corporate group in Indonesia pushed the cost of banks above 40% of 1998 GDP. In India, monopoly, ie monopoly, is visible in the trade from telecom to transport.
Penetration of capitalism
Capitalism, born out of big houses, has started making its inroads in India, which is emerging as a demon like Frankenstein after a decade and a half. Politicians began to infiltrate the private sector in the early 1990s. And then in the name of Public Private Partnership (PPP) and fast economic development, the monopoly of loans started.
Drowning of IL&FS
In 2018, the financier IL&FS group started working for better infrastructure in the country. It went bankrupt. Due to the money problem, later some more big equity financing companies started to collapse. Since then the churning phase has been going on and it has reduced competition and increased concentration. But there is a greater need to find private capital to take fresh risks, especially in the aftermath of the worsening economic situation.
Fall in GDP
In 2025, per capita gross domestic product (GDP) could be 12% below pre-virus estimates, says Priyanka Kishore of Oxford Economics. This means that it is going to be the biggest wound among major economies globally. This is against the backdrop of the RBI’s internal group review of bank ownership.
DBS and Lakshmi Vilas Bank merge
The report comes at a time when RBI has approved Singapore’s DBS Group Holdings Limited to takeover Lakshmi Vilas Bank. This is the third bank in the last 15 months to fail. Before that there were 22 universal banks (and 10 so-called small finance banks) in the private sector in the country. These accounted for 30% of the total deposits. It was 13% two decades ago. Whereas foreign banks have a 5% stake which is quite low. The market share of major public sector banks was 82% in the year 2000 which has come down to 65%.
Decreasing number of public sector banks
This process is going to get faster. Because government banks will be reduced from 12 to four. There is no doubt that more and more private banking capital will be required. Still, should the country really look to big houses to provide it? Risky options are few.
For example, the RBI can now close the rules to reduce the owners’ 15% stake in private banking. The Working Group wants that the controlling stake limit should be raised to 26%.
40% shareholding plan
The Monetary Authority (Monetary Authority) wants at least 40% shareholding for the controlling owner of the bank in the first five years. It can easily say that “if you want it for 15 years, you can keep it at that level. If you don’t behave properly, take bribes, give loans continuously, then we give your voting rights. To 5%. Will replace your board. Will make your bank an M&A (acquisition and merger) target.
Logic of diversification
The argument in favor of diversified bank ownership works when the shareholding limit of 15% or 26% is effective. When the board does its job. This did not happen in Axis Bank Limited, ICICI Bank Limited and Yes Bank Limited, which for a long time failed to rein in its CEOs (CEOs) as bad loans became more frequent. The regulator had to drive them out. Now what was the need for excuses.
Bank licenses also do not guarantee success.
Bank licenses also do not guarantee success for highly leveraged groups. He works on the English proverb to big to fail (I am so big that I will be saved from drowning). RBI got an institution like DBS to save Laxmi Vilas Bank Limited. Its accumulated capital fell to 2% in six months to September. While everyone knew that the bank’s negative capital adequacy ratio was not giving a good sign.
Regulators and public confidence
The regulator should not play with public confidence. The failure of IL&FS reflects the inefficiency of a traditional bank’s balance sheet. For a bank like JP Morgan’s, laying a red carpet would be like abandoning the RBI’s objective of ensuring its financial stability.