Risk Of License For New Banks
By: Jaithirth Rao
Dear Shri Subbarao, Mark Antony refers to Brutus and his friends as "honourable men." In the same spirit, I would like to say that our major industrialists are all honourable men. But I would beg you not to grant banking licenses to these honourable persons.
In the bastions of market capitalism - New York, London and Brussels, let alone in Dublin and Reykjavik - it has been established that hapless taxpayers will bail out banks irrespective of the risks these banks take in arcane areas like credit derivatives, double-securitised mortgages, sovereign credits to profligate governments and other transactions ascribed to a mysterious London whale.
Remember R K Hazari
Once we allow desi business houses to set up banks, not only will Indian taxpayers have to bail them out of their banking mistakes (and trust me, they will commit mistakes on a gigantic scale), we will also have to bail out steel companies, cement companies and telecom companies that these groups control (where there is no reason to believe that they will not commit mistakes).
They will produce unassailable reports from unassailable economists arguing that our economy will be irretrievably hurt, unless we bail out these bank promoters from the "systemic risk" associated with their other companies.
The citizens of Ireland and Iceland have paid for the follies of their banks. The citizens of India will be called upon to pay for follies associated with building inefficient steel plants, running cement plants badly and pricing telephone calls stupidly. Despite all the controls, separation of operations and Chinese walls that the honourable business houses promise to adhere to, there will be pooling of funds and pooling of risks.
If the business house's engineering company suffers a rating downgrade, for instance, do we really think that there will not be a contagion effect? And will there not be well-meaning economists begging you to save the engineering company because that would be a patriotic act "essential" to protect the bank's depositors? The late RK Hazari was an illustrious deputy governor of your institution.
Hazari produced a brilliant report in the 1960s which showed how cleverly our business houses used the permit-license raj to enrich themselves and hold back economic growth of the country as a whole. The control of banks and insurance companies by the honourable business houses was in fact cited frequently those days as having baneful economic consequences.
It is widely held by economic historians that if the entrenched rich are allowed to control financial markets, then they consciously or otherwise, make sure that new and not-sowell-connected entrepreneurs are deprived of access to capital. Banks controlled by large conglomerates will almost certainly set back the entrepreneurial movement in the country, where the emerging ecosystem is allowing persons without inherited wealth a semblance of access to capital.
Dear Shri Subbarao, Mark Antony refers to Brutus and his friends as "honourable men." In the same spirit, I would like to say that our major industrialists are all honourable men. But I would beg you not to grant banking licenses to these honourable persons.
In the bastions of market capitalism - New York, London and Brussels, let alone in Dublin and Reykjavik - it has been established that hapless taxpayers will bail out banks irrespective of the risks these banks take in arcane areas like credit derivatives, double-securitised mortgages, sovereign credits to profligate governments and other transactions ascribed to a mysterious London whale.
Remember R K Hazari
Once we allow desi business houses to set up banks, not only will Indian taxpayers have to bail them out of their banking mistakes (and trust me, they will commit mistakes on a gigantic scale), we will also have to bail out steel companies, cement companies and telecom companies that these groups control (where there is no reason to believe that they will not commit mistakes).
They will produce unassailable reports from unassailable economists arguing that our economy will be irretrievably hurt, unless we bail out these bank promoters from the "systemic risk" associated with their other companies.
The citizens of Ireland and Iceland have paid for the follies of their banks. The citizens of India will be called upon to pay for follies associated with building inefficient steel plants, running cement plants badly and pricing telephone calls stupidly. Despite all the controls, separation of operations and Chinese walls that the honourable business houses promise to adhere to, there will be pooling of funds and pooling of risks.
If the business house's engineering company suffers a rating downgrade, for instance, do we really think that there will not be a contagion effect? And will there not be well-meaning economists begging you to save the engineering company because that would be a patriotic act "essential" to protect the bank's depositors? The late RK Hazari was an illustrious deputy governor of your institution.
Hazari produced a brilliant report in the 1960s which showed how cleverly our business houses used the permit-license raj to enrich themselves and hold back economic growth of the country as a whole. The control of banks and insurance companies by the honourable business houses was in fact cited frequently those days as having baneful economic consequences.
It is widely held by economic historians that if the entrenched rich are allowed to control financial markets, then they consciously or otherwise, make sure that new and not-sowell-connected entrepreneurs are deprived of access to capital. Banks controlled by large conglomerates will almost certainly set back the entrepreneurial movement in the country, where the emerging ecosystem is allowing persons without inherited wealth a semblance of access to capital.
Reining in Brutus
From a political economy perspective, we already have a situation where business houses have acquired disproportionate power, something which is dangerous for our democracy. In the India International Centre in Delhi, "informed" people have hush-hush discussions that secretaries and even cabinet ministers have been sponsored by specific business houses.
It is said that Goldman Sachs can learn lessons from our business houses as to how to go beyond crony capitalism and move on to the commanding heights of regulatory and state capture!
If this is the case today, what will happen if our honourable business houses are given banking licenses, adding to the clout that they already possess? Government spokespersons are making the case that the entry of honourable business houses into banking will increase competition.
The only rational response to such bizarre arguments is the old one: "You must be joking?" There is nothing to prevent the government from selling down its stakes in nationalised banks to a large diversified investor base. After all, many of them were taken over in 1969 from honourable business houses. That would automatically improve the competitive environment in Indian banking.
But our imperial and imperious government in Delhi will always reject the obvious solution. In order to prevent a sleight-of hand action, you must use the oldest weapon in the armoury of the Indian bureaucracy. Before you retire governor Subbarao, please write a strong file note emphatically turning down bank licenses for our honourable business houses.
Once this "note" and related "notings" are in place, given that these are the days of RTI, it will become impossible for Brutus' contemporary compatriots from gaining power. It will be a step towards making India pro-business rather than pro-markets, and weakening our democracy.
From a political economy perspective, we already have a situation where business houses have acquired disproportionate power, something which is dangerous for our democracy. In the India International Centre in Delhi, "informed" people have hush-hush discussions that secretaries and even cabinet ministers have been sponsored by specific business houses.
It is said that Goldman Sachs can learn lessons from our business houses as to how to go beyond crony capitalism and move on to the commanding heights of regulatory and state capture!
If this is the case today, what will happen if our honourable business houses are given banking licenses, adding to the clout that they already possess? Government spokespersons are making the case that the entry of honourable business houses into banking will increase competition.
The only rational response to such bizarre arguments is the old one: "You must be joking?" There is nothing to prevent the government from selling down its stakes in nationalised banks to a large diversified investor base. After all, many of them were taken over in 1969 from honourable business houses. That would automatically improve the competitive environment in Indian banking.
But our imperial and imperious government in Delhi will always reject the obvious solution. In order to prevent a sleight-of hand action, you must use the oldest weapon in the armoury of the Indian bureaucracy. Before you retire governor Subbarao, please write a strong file note emphatically turning down bank licenses for our honourable business houses.
Once this "note" and related "notings" are in place, given that these are the days of RTI, it will become impossible for Brutus' contemporary compatriots from gaining power. It will be a step towards making India pro-business rather than pro-markets, and weakening our democracy.
No comments:
Post a Comment