View: Kotak, Kapoor, Bajaj, Gelli and the noise over bank license

Professionals Ramesh Gelli who founded the Global Trust Bank and Rana Kapoor who started Yes Bank ran those two institutions aground forcing the regulator to come up with a bailout package. Uday Kotak, who converted his shadow lender into a bank, ...

Mumbai: No other proposal from the Reserve Bank of India in recent years had triggered as much enthusiasm and fear in equal measure as the possibility of letting Birlas, Tatas, Ambanis and the Bajajs own a bank.

It is not surprising to see who is in which camp. The likes of Birlas to Bajajs, who run shadow lending operations, believe that at last the regulator is moving from the easy option of painting everyone with the same brush. They are open to doing their work in choosing good and junking bad after having built lending business that are bigger and better than some banks.

Rating company Standard & Poor’s, which was accused of having had a role in perpetuating the Global Financial Crisis of 2008, has raised red flags about letting industry own banks. So are two former regulatory heavyweights – former RBI Governor Raghuram Rajan and deputy governor Viral Acharya.

While the industry is showcasing its work over the past two decades – Bajaj Finance has assets of more than Rs. 1.3 lakh crores and Tata Capital Rs. 83,000 crores – in building stable businesses, skeptics point to the possibility of robber barons putting the financial system at risk.

Another reason to "prohibit corporate entry into banking is that it will further exacerbate the concentration of economic (and political) power in certain business houses,’’ say Rajan and Acharya in a social media post.

While the internal working group has recommended bank licenses for the likes of the Tatas, it has done so with caveats - and after having gone through the history of bank licensing and the state of Indian banking.

Two data points show that private capital is essential when the financially broken state can’t fund the banks it owns. State run banks’ share of deposits is down to 65 percent from 82 percent in two decades and loans are down to 59.8 percent from 79 percent.

During the last five years, private banks raised Rs. 1.15 lakh crores in equity capital from investors while PSU peers raised Rs. 70,823 crores. Taxpayer money of Rs 3.18 lakh crores was consumed by state-run banks.

Raw material for banking is capital and that has to come from someone. There’s little dispute about the need for private capital but who should be permitted to run a bank is the moot question. That is because he would be the custodian of savings of a school teacher or a civil servant. What if he diverts these funds to run his businesses compromising the common man’s interest? That is the question posed by Rajan and Acharya.

Historically, the RBI has been shunning industry and promoted professionals though in the first round there was no formal prohibition of Birlas and Tatas.

Ten licenses were handed out in the 93-94 of which only institutions backed and Hinduja promoted survive. In the second round two were licensed – Kotak Mahindra Bank and Yes Bank. Two more – IDFC Bank and Bandhan Bank - were licensed in the third round.

While the Indian financial system produced many heroes since liberalisation, there were villains as well. Where do these two categories come up in this licensing debate?

Professionals Ramesh Gelli who founded the Global Trust Bank and Rana Kapoor who started Yes Bank ran those two institutions aground forcing the regulator to come up with a bailout package.

Uday Kotak, who converted his shadow lender into a bank, hails from a family that traded in cotton and Sanjiv Bajaj who built Bajaj Finance into a consumer lending machine has his family roots in automobile business.

A glance at the valuations of Indian financial services firms tells a story. In these troubled times, Kotak Mahindra Bank has a price to book value of 5.5 times and Bajaj Finance 8.3 times, the highest premium in their respective segments.

Who is better? Professionals or industrial houses?

Wall Street was and is still run by professionals. One of the CEOs from a top bank once said, `none of us would be around but for the Fed.’ There have been failures across the world and many of them were not owned by industrial houses as they were by Medicis or the Rothschilds.

The collapse of a few professionally run banks in India and the thriving of banks with origins in trade and industry make it a tough regulatory choice.

If it is for private capital, the RBI needs to relook at how it wants to treat private equity funds. Recent episodes like JC Flowers’ inability to conclude a transaction to buy Yes Bank due to technical issues, and Clix Capital pulling out of Lakshmi Vilas Bank could help evolve guidelines for such deals.

Be it the individual, industrial house or private equity, it is the value system and the processes that the leader puts in place that would differentiate between success and failure. But how to know it beforehand?




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