The Reserve Bank of India
(RBI) on Friday released a report of its internal working group (IWG) on ownership guidelines and corporate structure of Indian private-sector banks. The report created huge ripples by recommending that “large corporate/industrial houses may be allowed as promoters of banks ...”. The IWG also recommended that well-run large non-banking finance companies (NBFCs), including those which are owned by corporate houses, may get bank licences. The panel also suggested that payment banks could convert into small finance banks after three years of operations.
Earlier, the RBI had allowed urban cooperative banks (UCBs) to convert into small finance banks and the Union Budget for FY21 also gave the RBI complete control over UCBs. And then, since August, according to media reports, the central government [which has continued with its silly tinkering of public-sector banks (PSBs)] would privatise some of the smallest PSBs. And, in a remarkable, clear-headed move, the RBI allowed DBS of Singapore to take over the ill-managed Lakshmi Vilas Bank, which had failed to attract any suitable proposals.
Clearly, under Governor Shaktikanta Das, the RBI has been moving speedily (in sharp contrast to its usual glacial pace) on banking reforms. What are the implications? How many of these moves are likely to be fruitful? Are the fears that big business houses will acquire banks and misuse them justified? The most crucial question (though there is little debate on this) is, will any of this mean a big difference to the quality and cost of banking services for depositors?
1. Nothing so soon
For starters, if past timelines are any guide, policy changes are unlikely to happen very soon. A discussion paper on new banks was issued in 2010, but the draft guidelines were released in 2011, and the final guidelines came in 2013. After this, only two new banks were licensed under the new norms, that too in 2015, five years after the discussion paper! The IWG report, released on Friday, is no more than one such discussion paper. Until 2013, new bank licences were issued under the 2001 guidelines. So, how many new banks were permitted between 2001 and 2010? Just two — YES Bank and Kotak Mahindra Bank! Of course, after 2014, the RBI has allowed more than a dozen banks to be launched. They were of two types — payments banks (which expectedly failed) and small finance banks, which, even collectively, have hardly made any difference to the competition and quality of banking services. The reason only two banks were licensed between 2001 and 2015 is that heavyweight incumbents lobby to keep out competition. Will we now see something different, say, six new banks being licensed in the next two or three years?
2. The real test: Cost and quality
The bigger point is that the debate over licensing more banks, allowing business houses into banking, allowing different categories of banks, putting caps on controlling stakes … is largely about technical issues. They dominate media discussions because journalists take their cue from businessmen and policymakers who are occupied with these matters. What do any of these issues have to do with those who are on the outside — hundreds of millions of depositors and borrowers, on whose money or borrowing the banking business is based?
Issues such as whether business houses should be allowed into banking or what the controlling interest of promoters should be are merely structures and formats through which banking services are delivered. The real test of policies is whether they lead to better customer experience by way of improving banking services at a low relative cost, as banks reap the advantages of technology and scale. This is what all economic progress boils down to. In sector after sector — mass transportation, entertainment, daily items of consumption, electronics, automobiles — consumers have benefited over the decades through competition and scale by way of continuous reduction in relative costs and better quality of products and services. This is least visible in financial markets. The most common complaint of financial consumers is cumbersome processes, complicated products, usurious charges, and mis-selling of products, which finally don’t deliver what is promised or as expected. Worse, if they are wronged or cheated, the process of redress is frustrating and loaded against the consumer. Isn’t all this ironic? These sectors are regulated the most, and yet (or, perhaps, therefore) customers don’t get the full benefit of falling costs and improved services that come with competition, technology, and scale. That is a policy failure.
In 2014, the P J Nayak committee report had discussed governance issues in bank boards. Although the committee had nothing to do with consumer issues, it had a section on mis-selling: “The new private banks have achieved dominance in the distribution of third party products, particularly insurance and mutual fund products. Life insurance distribution, in particular, has constituted a major source of fees earned, but has also given rise to widespread criticism of mis-selling. India lacks a customer protection law for financial products which can lead to speedy (redress) of customer complaints…” The committee felt this issue was so serious that bank boards must get involved in “oversight on customer protection in the distribution of third-party products”. Nothing happened, because such mis-selling helped the bottom line and policymakers couldn’t be bothered. Will the RBI set up a working group to measure whether competition is driving better products and services at lower costs? That would be a real progress.