Last week, a Reserve Bank of India (RBI) working group proposed to give banking permits to large non-banking finance companies (NBFCs) and big businesses.
These recommendations triggered debates. A section of experts, including former RBI governor Raghuram Rajan, strongly argued that allowing corporates in banking is a bad idea. This can damage the banking system, Rajan said. The renowned economist also questioned the timing of the RBI working group recommendations.
Since economic liberalisation, the RBI has issued three sets of private banking permits. Bandhan is one of the two recipients of private bank licences in the last round (2014-15).
In an exclusive interview with Moneycontrol on November 24, Bandhan Bank’s Managing Director and CEO Chandra Shekhar Ghosh said giving entry to corporates, with proper regulation, is not a bad idea.
Also, NBFCs have both benefits and disadvantages in converting themselves into banks and each company has to take a call, Ghosh said.
Is it the right time to give permits to more commercial banks?
India is a big country. For financial services to expand to rural areas and enhance financial inclusion, the country needs more private banks. Companies that have the capacity to provide banking services should be given licenses.
Is there a risk in giving more bank licences?
We already have different types of banks like co-operative banks, payment banks, small finance banks and regional rural banks. Every bank has different eligibility criteria and objectives. Regulation is also different for different types of banks. India has a robust regulatory mechanism for each type of bank.
How about corporates entering banking?
Corporates have money and experience which can benefit the banking industry. People are criticising this part. But with the right kind of monitoring and supervision, the risks can be addressed.
So, are you saying corporates entering banking is good?
If corporates maintain good governance and best practices under the tight supervision of the RBI, then corporate entry into banking is good.
But, corporates are also borrowers. Won’t this lead to a conflict of interest?
As I said with the right set of regulations, this issue can be addressed. The three-tier structure will help to ring-fence the banking company from the group. This will include a non-operative financial holding company, holding company and subsidiary structure.
How about NBFCs converting to banks?
Be it an NBFC or bank, there should be a strong supervisory system—internal and by the regulator. NBFCs are dependent on bank funding for operations. And since they are dependent on bank funding, they cannot grow beyond a size. A bank can tap public deposits which helps to bring down the cost of funds of products. This helps the entity to grow more.
What are the challenges for an NBFC?
Converting from a bank to an NBFC is challenging because of the strong compliance system and closer monitoring by the regulator. It’s a challenge to adjust to this compliance. There are certain activities that a bank cannot do but an NBFC can—for instance, loan against shares.
Also, an NBFC can choose to cater to a single vertical but a bank cannot serve only one vertical. So there are challenges and benefits of becoming a bank. Ultimately, it is a choice for the NBFC (whether to convert to a bank or not). Some of them may choose not to become a bank.
RBI report talks about raising promoter holding to 26 percent as against 15 percent. Is this a welcome change?
Very much welcome. Under the holding company structure, individuals are not the promoters but the holding company. So, be it 15 percent or 26 percent, any individual promoter cannot control the bank.
In Bandhan’s case, promoter holding is 40 percent. If these proposals become rules, how will this impact you?
We will have 10 years of time to reduce promoter holding from 40 percent. During that period, our business growth will also require more capital and we can use this headroom to raise capital.
Will the 26 percent proposal help new baking entrants?
Yes. For a new banking entrant, there is a timeframe of 15 years to reduce holding (if RBI accepts the working group proposals). The bank can focus on business during these years without worrying about promoter stake reduction. It is good for the banking industry.
What are the latest figures on Bandhan’s collection numbers?
Collection efficiency has been improving. As of October, 95 percent of our customers have been paying. So there is a recovery visible.
What is the demand on loan restructuring?We have seen only very few requests from loan restructuring from housing and MSME (micro, small and medium enterprises). There are no loan restructuring requests from micro-borrowers.