Bill will increase competition in banking biz: Kidwai

HSBC India head Naina Lal Kidwai, in a reaction on the approval of the Banking Bill in the Lok Sabha on CNBC-TV18, explains that this is a very important signal sent out by the government. Through the Banking Bill, Kidwai says, the  RBI's purview has been widened on the central bank's suggestion of an increase in the number of bigger banks and intensifying of the competition in banking sector.

Kidwai adds that banking is a sector that can  attract private equity and aid the government’s effort to reduce  its stake in public sector banks. "There will be many takers for new licences to operate in the banking sector," she estimates. Below is the edited transcript of his interview to CNBC-TV18 Q: What are your thoughts on the banking amendment bill being passed by the Lok Sabha and likely to be cleared by the Rajya Sabha? A: It is something we waited for a while. It is an important one to see through because there are many reforms in there which are not really significant in themselves. However, they are much needed collectively. Important in terms of what it means going forward and the signaling effect that finally after two years of waiting some of these bills are finally seeing passage, parliament is working and all parties are coming together having healthy debate.  However, at the end of the day at least these bills are seeing the light. The companies’ bills also have significant amendments which we do need to up date. All 1950’s Act important to see through. So, it is to my mind a very important signal. Q: What is your own sense on how quickly we are going to see the final guidelines being issued by the reserve bank and then the process of inviting applications on actually being able to issue bank licenses? A: I have no doubt that the RBI has been thinking through this very careful. They knew that this was on the cards. The definition of fit-in proper is going to be very important and how they narrow down this process is something which is going to be a challenge.  There are many takers. RBI itself is going to have to work, as it does through very clear cut norms. I would expect that there would be some of these policies put out. As they often do in terms of a dialogue and inputs sought on a proposed process. We would then understand what their thinking is and then policy being issued thereafter. So, before the first licenses come out it will be still at least a year to 18 months away. However, the fact that there would be new licenses given is now open and up to RBI to take forward. _PAGEBREAK_ Q: How many licences are we actually talking about? What is too much, what is not enough, where do you stand on that debate? A: At the end of the day looking at this holistically in terms of where we are as a banking sector you could always take a view that we need some consolidation. That consolidation should be to create bigger banks. There is competition in this sector and more competition helps. There is a view that new players bring new ways of doing things. That has some merit. There will be some that will have agricultural focus otherwise others have more on electronic banking focus. Those innovations could also be reasons- why you want more players. However, for us the answer is we need a bigger banking sector. One of the big constrains to the growth of the banking sector in India has been that government itself owns 70 percent of the banking sector. We saw how slowly they actually came forward to give State bank of India the funding it needed in terms of its own equity growth. RBI had put out the numbers, incase government owned banking sector needs capitalize itself given current growth and the new Basel III requirements. What we need is more capital. If it isn’t going to come into the government owned sector because it has to then come out of the fisc. If it is going into the governments sector then could well be towards new banks which are free to go out and get the money from the capital markets.  The right answer has to be some consolidation. Government letting go of owning all the banks it does so that those that are already over scaled can grow large based on getting equity capital in the same way as the ICICI’s and HDFCs do from capital markets. Those are not constrained by government ownership norm which is not enabling or allowing them to go out and raise the money. We have to look at this as a sector as a whole and enable the sector to grow. New Bank licences is just a small part of it. Q: It is a little disconcerting that government is now taking the steps to issue licenses perhaps a Tata Bank and a Birla Bank but is not able to see the wisdom of reducing its own stake in public sector to 33 percent or 26 percent. Do you that that will be the next threshold of reform to make the public sector more efficient and more competitive? A: Not necessarily coming down to 33 percent and 26 percent. You can continue with 51 and 60 and fewer banks and let go off others. Q: Do you think that if the rules are very onerous that it should be 40 percent in the beginning and it should be kept bringing down a lot of promoters will not throw their hat into the ring? A: It is possible. But I think this is a sector, which will attract private equity, be initial public offering and companies can be listed. So, money can be raised from capital markets in time. The solutions are there. The onerous bit would be if it has to happen in too shorter timeframe. We have now had the experience of the last number of banks, which actually were given licenses the Yes Bank, Kotak, IndusInd etc. That experience I am sure guide us to what this new policy can be. I don’t believe it is impossible. I still think there will be many takers and there are many institutions, which would like that license. Many which well deserve it, corporate as well. Getting some of those players in. The NBFCs to allow them to move into a banking framework, which is much more regulated bank versus NBFC, may not be a bad thing. I would rather have more banks and fewer NBFCs than what we have right now. That is many NBFCs, which would like to be banks, but are not being allowed to.