UPSC CSE MAINS SYLLABUS – UPSC CSE MAINS SYLLABUS – GS – 3- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Corporate Houses – Banks
The NITI Aayog CEO lamented recently that India’s private credit-to-GDP ratio is the lowest amongst global peers.
According to BIS 2019 statistics, credit to the non-financial sector as a percentage of GDP stands at 56% in India, as against 150% and 205% in the US and China, respectively. The MSME credit needs are largely unmet by the formal financial sector, leading to an estimated MSME credit gap at Rs 25 lakh crore.
RBI, in September 2020, actively updated/reclassified priority sector norms and MSME definition to enable better credit penetration by banks. Yet we need an all hands-on-deck approach to satisfy latent credit needs of the MSME network encompassing the government, regulators and industry.
The importance of RBI Internal Working Group (IWG) recommendations:
- Given the aforesaid context, the IWG’s key recommendation of allowing NBFCs with assets of Rs 50,000 crore and a track record of 10 years appears a better way of regulated re-entry of trustworthy corporate houses into the banking system.
- If reputed, well-managed corporate-owned NBFCs align with banks with a good network but poor management, it will be a win-win solution for the system.
- Backing of a strong corporate group also reassures depositors of struggling banks.
- After all, specific regional industrial groups have always enjoyed public trust comparable with banks.
- The IWG has also suggested amending the Banking Regulation Act, 1949, to prevent connected lending and rightly emphasised a consolidated supervision mechanism for conglomerates.
What is needed:
- It is not that industrial houses owning banks have a freehand in lending to group entities as RBI has sufficient powers to restrict intra-group exposures.
- RBI can also prescribe a higher risk weightage to ensure that pricing for intra-group lending is not preferential but market-driven.
- Enhancing the MSME network could be another objective for allowing banking licences to professionally-managed corporates with a strong governance background.
- The expertise of corporate groups in supporting MSMEs to scale up and become reliable suppliers in local/global supply chains needs to be leveraged whilst issuing licences.
- Given that corporate houses actively build their supplier networks through MSMEs, they have a better understanding of key criteria that can distinguish between a well-run MSME and a poor one—a crucial criteria that many standalone banks lack and, therefore, loss ratios in the MSME segment are much higher for such banks.
- RBI may choose to prioritise licence applications of shortlisted corporate groups, basis their direct and indirect commitment in creating fresh priority sector supplier networks that meet MSME plant and machinery investment definition criteria;
- Alternatively, RBI may prescribe a higher commitment target for corporate-owned banks towards MSME lending.
- Such higher commitment to the MSME segment can be relaxed based on their RBI audit results on governance and management systems.
- Preferential licensing based on investment commitment with MSMEs may be difficult for banks to drive, although differential priority sector commitments could certainly help drive behaviour.
- The biggest worry for any new private bank is building a cost-efficient liability base, besides meeting stringent priority sector obligations. Promoter groups would invariably need to support fledgling bank franchises with group deposit accounts initially.
- With RBI mandating 40% of a bank’s lending be directed towards priority sector like MSMEs, agriculture and weaker sections, many corporate houses remain wary about such directed credit allocation targets.
- Only serious contenders with a governance track record will gain RBI’s nod.
- Even so, the importance of keeping out highly indebted industrial groups with a poor track record from licensing cannot be ignored;
- Perhaps a shortlisted and negative list of promoter groups can be created—something that is not difficult for RBI.
Unethical practices in any bank have to be punished with a heavy hand as integrity and probity are paramount in banking. Strong legal action initiated recently for financing frauds and resultant NPAs in the banking system needs to be taken to a logical conclusion.
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