Big business owned banks -a Trojan Horse?

Indian Left Liberal intellectuals are letting their shallow ideological moorings show. They support the agricultural reforms initiated by the Union government, including the corporatization of agriculture. But they oppose letting big business own banks, reflecting the colonial disdain for “box-wallahs” (business).

Yes, to agricultural reform, including corporatization

Farmers in Punjab and Haryana — the “gold standard” of agricultural productivity in India — have partially locked down Delhi against the government’s hurried attempts to liberalize the marketing of agricultural produce, allowing farmers to sell to anyone they wish. So why are the farmers outraged?

They say that they never asked for this “gift”, so why is it being imposed on them? They suspect that it is a move to allow the “backdoor” entry of “corporates” to buy land, dominate markets and eventually end agricultural subsidies. Never mind that what is intended is private competition to the regulated “mandis”, where wholesaler “Ardhtia” cartels dominate. Farmers will now have choice which should make these markets more efficient. But conspiracy theories, once born, acquire a life of their own.

But abject fear of “big business” owned banks

Curiously, otherwise forward-looking Indian economists, of the “left liberal” American tradition, condemn the suggestion of a Reserve Bank of India working group, to let industrialists own banks, albeit with suitable checks, to create a “Chinese wall” (bad name this one!) around the banking operations of such business groups, to avoid “connected or mutual” lending.

Never mind that “connected landing” is rampant even today. The only “unconnected” lending is when a middle-class woman needs a loan to buy a house or a scooter! For all other personal or business lending, “knowing” the bank manager helps. Networking has always been the traditional “oil” in the banking sector and “connections” matter.

Economists of repute point to these very ground realities to stress that “Big business” cannot be “trusted” to play with a straight bat. Allowing them in would scale up sector risk enormously, they say.

“Big business” can reduce systemic risk, enhance the share of privately managed bank assets and grow the aggregate level of credit available

Pause here for a fact check. The Rs 10 trillion-plus non-performing loans, even before the Covid-19 pandemic, are the consequences of “directed” lending to unworthy “favoured” business borrowers. These came to light when growth stalled, pulling out the plug from various Ponzi schemes in real estate and the stock markets. Stiffer asset classification rules from the RBI also helped to unearth the scams. It is publicly-owned banks which are the most affected, though poor governance and low managerial propriety standards were visible in some private banks as well.

Formalizing the reality of this “jugalbandhi” by letting big business own banks transparently, rather than remain the unseen puppeteer, can only help to reduce the existing systemic risk.  Ownership puts the onus on management to be rule compliant and profitable. Public banks are politically vulnerable to pressure. Growing the share of private bank assets to equal that of public banks (presently 70 per cent) will boost the aggregate level of credit, up from a low 60 per cent of GDP today, whilst also improving the quality of assets.

RBI must up its supervisory game. Timely and forceful intervention against delinquent management — private or public — as in the recent case of the Lakshmi Vilas Bank, is the way to go. There will always be a few rotten apples. Effective regulation can detect and contain the rot. Pulling-up the drawbridge against industry ownership is a negative end-game.

Industry “icons” should be invited into Bank ownership not shunned

Consider the oldest, iconic Indian “brand” — the Tatas. Do we envisage a Tata, a Godrej, a Bajaj or a Mahindra managed bank, being less sound than the “diversified ownership” private banks in operation today? Look at the “newbie” business brands — Jio for instance. Does Mukesh Ambani need to own a bank to get access to credit or to nudge its flow? What if N.R. Narayana Murthy or Azim Premji were to float banks. What could possibly compel them to damage their international stature and credit rating by committing crass irregularities in their banking operations?

We have moved well beyond the stymied sources for wealth creation which existed in 1949, when the Banking Regulation Act was framed. Regulatory systems and public expectations have evolved. Even the 2013 RBI guidelines, liberalizing the entry of private banks, did not specifically bar big business from owning banks. This was sadly, reversed in 2014. Forty per cent of the capital of the best private banks is held by international investors. The gains from retaining a healthy and “sustainable” asset profile and international governance standards far outweigh the dodgy domestic “benefits” from bending licensing norms.

The “fears” of consequential “concentration of wealth” or “rising inequality” are bogus

Left-leaning consumer activists raise the spectre of “concentration of wealth” and “higher inequality” if business is let in through the banking door. These fears are overblown. Increasing the number of well- capitalized private banks will induce competition and dilute the concentration of economic power. The way to reduce inequality is not by preventing billionaires from becoming richer, but by improving public services, creating decent jobs and enhancing the incomes of the poor.  

Economic growth, liberalization and corporate globalization are inseparable

Globalisation, corporatisation and industrialisation do tend to concentrate surpluses at the top. But they also expand the economic pie. Walking away from these pervasive global trends is not an option if growth is to be preserved. Pushing growth to the high single digits, requires more liberalization — cutting through the post-1991 residual red tape and “re-liberalization” — hacking through the new accumulation, since then, with a motorized saw.

Ending “Crony capitalism” is linked to the quality of democratic governance, not the structure of business ownership

The key to manage big corporates is to have strong community-based governments with heightened accountability to the people, so that “cozy deals” and “crony capitalism” — a much larger generic problem beyond banking — are exposed and the guilty brought to book.

Are we there yet? Possibly not. Can we get there. Yes, we can. But not by stepping into Emperor Xi’s boots and undermining the public profile of big business — just to keep them in respectful submission. Chinese regulators, last month, torpedoed the giant $35 billion IPO of the Ant Group in Shanghai and Hong Kong to rein in the “outspoken” Jack Ma (shades pf Rahul Bajaj?), who criticized the government publicly.

Liberalized banking is the future “commanding height” of the economy

Efficient banking is a key “commanding height” of the Indian economy. Accountability of banks to their creditors and minority shareholders needs to be strengthened. The RBI recognises that. But to shun the financial heft and managerial excellence of big business in scaling up bank services is like marching into the future with one hand tied behind our back. Ideologically pure, possibly, but irresponsibly courageous and blindly devotional to the blunt governance strategies of an earlier era.

Also available Asian Age December 4, 2020

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