More bank licenses.. Boom to Bust?

March 01, 2010 06:39 PM

R. Balakrishnan

The ‘good’ news is that the banking market

will be opened up for a few more private players.

But how many of these new entrants actually pass muster?

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.