RBI panel recos: Experts say more banks not an answer to increased credit flow

An Internal Working Group of the Reserve Bank of India (RBI) on Friday recommended a set of seminal changes for the banking sector. They include, granting banking licences to corporates promoters being allowed to raise stake to 26 percent from the current 15 percent, and allowing large NBFCs with over Rs 50,000 crore in assets under management to become banks even if they are owned by corporate groups.

This can change the banking landscape, especially if conglomerates and their NBFCs are given banking licences. What is the reasonable expectation as to when this can all happen and will these recommendations become regulations or are these recommendations likely to fall by the wayside as they did on previous occasions?

To discuss that, CNBC-TV18’s Latha Venkatesh spoke to NS Vishwanathan, Former Deputy Governor of RBI; SS Mundra, Former Deputy Governor of RBI; and Sanjay Nayar, CEO & Country Head of KKR India.

“There isn’t a global standard so RBI wanted to know what are the arguments for and against industrial house been given a licence,” Vishwanathan said.

“The logic is that they do not want to mingle the commercial business with the banking activity. My personal view on this is that there hasn’t been any major argument in the report to say why this current stance has to be changed,” he said.

Vishwanathan said the RBI today had a lot more statistical capabilities, data mining capabilities, data availability

“The way forward in terms of improving the quality of supervision is to have big data, have analysis done well before you go and then validate it or find what is going wrong or right at the bank,” he said.

Mundra is of the view that more banks are not the solution for improving credit flow in the system.

“I am not fully convinced that we need to unleash a dozen of new banks to bring the growth in this country,” he said.

“I think we have already introduced a number of banks and varieties of banks and the segment for which we are talking about the credit needs to be catered to needs more market instruments and more developed market rather than bringing it under banks,” he said.

“Rather than thinking of only converting everything into SFB (small finance bank) and if our idea is to have the financial inclusion and large penetration of credit, it would be a great idea to allow the payment bank to do something credit. So there would be another institution in addition to the universal bank and SFB and serve the purpose very well,” he said.

Nayar feels 2-3 very large NBFCs need to be given freedom to quickly become banks.

“Otherwise, we are running 2 big risks. One that they are penetrating a lot and they are doing a fantastic job of a private mindset, the risk management and risk taking, but they will need deposits and they will need a much more sustainable business model. So, that is an absolute number one priority,” he said.

“The number two priority is the lead regulator should equip itself with the supervision capacity, at least start by regulating these complex, very large, very distributed NBFCs,” he said.

“We don’t need a dozen new banks but the big NBFCs who are doing a very significant amount of credit penetration have got to get a much more legitimate sustainable platform for growth,” he said.