[Pramod Rao is Group General Counsel, ICICI Bank. This post represents his personal views]
With the release of the Reserve Bank of India’s (RBI) Report of the internal working group to review extant ownership guidelines and corporate structure for Indian private sector banks, several articles and commentaries have been published. What has attracted attention has been a qualified recommendation that seemingly opens the doors to grant of banking licences to business houses, for conversion of payment banks to small finance banks and eventually universal banks, as well as large non-banking finance companies (NBFCs) being permitted to convert to universal banks. An overwhelming majority of such articles and commentaries have been critical of the recommendations, and concerns continue to be expressed about the plutocracy that owns just about everything also owning and operating banks.
For the record, the RBI Governor has clarified that there is no stated position taken by RBI on the subject as of now and to treat the views and recommendations of the internal working group (IWG) as distinct from that of RBI. Whilst a lot has been written, I am taking the risk of adding my views to the cauldron of opinions and giving it a gentle stir.
Among the arguments for considering entry of business houses into banking is that the Indian economy needs much more capital and credit to grow. It is perceived that large corporates, with deep pockets, are the ones with the financial resources to fund India’s future growth and hence permitting them to set up banks will help. This argument is specious as a vast majority of corporates business houses are built on debt, and the so called ‘deep pockets’ are in reality lined with borrowed money. If we really have to indeed consider allowing the entry of corporates or business houses into banking business, few suggestions are set out below.
Firstly, only corporates or business houses (across all the entities comprised in the business house) that are debt-free and cash rich should be considered for banking licences and not otherwise. A corporate or business house being net debt free should not suffice, since that still means and implies a business built on debt.
Secondly, such a debt-free status could be for at least a three to five year look-back period (if not longer) and a commitment to stay debt-free through the time that the corporate or business house remains a promoter and holds more than 15% of the share capital of the bank (or the non-operating holding company).
A further condition on such corporates or business houses should be that they cannot be a credit support provider (for example, they should not have issued guarantees or letters of comfort) or be a credit reference (example being an obligor in factoring transactions or securitization transactions), nor conduct any lending or investment business (including via intercorporate deposits or deployment of surpluses into debt or equity instruments, securities or in mutual funds) through any other entity. This would also ensure parity among existing banks which have limits and restrictions on lending and investing, and ensure a level playing field amongst banks.
Accordingly, any borrowing, lending or investing activity for and by the business house should be the exclusive preserve of the bank set up by it, paraphrasing the adage “neither a borrower nor a lender nor an investor be if you’d want to have a banking business” to convey the point.
Finally, such corporates or business houses should not be permitted to be providers or suppliers of any services, property, equipment, outsourcing services or technology to the bank (or other banks): clearly only capital and management is what they would contribute. Either the bank should be self-sufficient in all respects or it should engage only completely unrelated third party service providers who also affirm that they have no dealings with the corporate or the business house that set up the bank at risk of claw-back and penalties if the contrary is established later.
The above recommendations are to eliminate indebted corporates or business houses from the reckoning for banking licences, ensure no connected lending or competing business with the bank is or can be conducted by the corporate or the business house, nor allow for any transactions among them that could cloak any underhand dealings.
The above recommendations coupled with clean track record (read as: no pending investigations, prosecutions or court cases by any regulator, revenue authorities or law enforcement agency against the corporate or the business house, nor any prior investigations or cases which had any adverse findings against the corporate or business house), requisite changes to the Banking Regulation Act or the Reserve Bank of India Act that allows the RBI complete authority to inspect, examine and probe any or all the entities of the corporate or business house and their dealings, to take necessary actions in case of detecting defaults and other supervisory powers should be the minimum for corporates or business houses being allowed into banking business.
Large NBFCs becoming banks: Given that the IWG also signals large NBFCs (many of which have been promoted by corporates and business houses) could become banks, the above approach should be applied for conversion into banks by NBFCs owned by corporates and business houses as well.
Privatization of public sector banks or rescue of weak banks or conversion of payments banks to small finance banks or universal banks: Similarly, the above approach should be applied in all these situations, if corporates or business houses are seeking to participate in privatization opportunities, rescue of weak banks or if they have payment bank licences and seek to convert them to small finance banks or universal banks.
Final Ownership levels: Finally, ownership limit by a single shareholder or group should remain limited to 15%. As is well known in the corporate law sphere, shareholding greater than 25% in essence provides a veto on proposals that require three-fourths majority approval. By specifying in the articles of association (AoA) of the bank (or its non-operating holding company) that even ordinary course matters require three-fourths majority could result in the corporate or the business house remaining entrenched and which could be detrimental to a public deposit taking institution. Hence, limiting the eventual shareholding to 15% as at present or at best increasing to 20% and disallowing any special rights in the AoA could be contemplated.
Due timetable for ensuring that the shareholding is brought within these limits should be part of licensing norms, and if extensions are granted to achieve the adherence to limits, then the licence conditions should also contemplate treating any surplus or capital gains arising as unearned income or as unjust enrichment and a high percentage of which should be paid over to the public exchequer by way of recompense, restitution or disgorgement rather than allow the corporate or the business house to benefit from its own tardiness in adhering to the agreed upon divestment timetable.
– Pramod Rao