Vault Matters: Who should own banks and non-banks?

Non-banks have become much larger than some of the mid-sized private banks

It is not so often that the central bank comments on the ownership styles and structures of banks and non-banks. Possibly for the first time on Wednesday, RBI Governor Shaktikanta Das in his monetary policy speech briefly dipped into the topic of ownership. The context was with reference to protecting the interest of borrowers.

“Driven by the significant accretion to their capital from both domestic and overseas sources, and sometimes under pressure from their investors, some NBFCs – including microfinance institutions (MFIs) and housing finance companies (HFCs) – are chasing excessive returns on their equity. While such pursuits are in the domain of the Boards and Managements of NBFCs, concerns arise when the interest rates charged by them become usurious and get combined with unreasonably high processing fees and frivolous penalties. These practices are sometimes further accentuated by what appears to be a ‘push effect’, as business targets drive retail credit growth rather than its actual demand. The consequent high-cost and high indebtedness could pose financial stability risks, if not addressed by these NBFCs,” the governor elaborated in his speech on Wednesday.

PE firms dominate ownership in private sector

Sample this: 70 percent of private banks and a little less than 40 percent of non-banks are private-equity owned. No private equity player can hold more than 10 percent stake in a bank. By virtue of this regulatory restriction, the ownership of banks is widespread; there is not much of an apparent concentration issue.

With non-banks, that is not the case. Take the examples of unlisted players such as Credila, Avanse or Tyger Capital (formerly Adani Capital). Over 80 percent of the stake in these NBFCs are concentrated with one private equity investor. In case of unlisted players such as Vistaar or Veritas, while the ownership in spread among two or three PE owners, the modus operandi is not very different. A few months from now, some of these lenders may seek an exit through an initial public offering. In order to get the business IPO ready, high growth and high profitability are imperative.

This is not to suggest that all PE-led lenders adopt unscrupulous methods of pursuing growth, but eye-popping returns cannot be generated by normal growth and profits. It’s not that once listed, lenders can take their feet off the pedal. If any, it becomes a chase quarter – after – quarter. The point here is that sprinters run shorter strides but at faster pace compared to marathoners.

PE-led lenders generally perform like sprinters - high return and high burn out.

With promoter-led lenders, there could be different issues such as excessive influence on the business or not much democracy in decision-making. But, they can afford a few normal or bad quarters when the macro environment is not very congenial. Just like marathoners have a better control over their speed compared to sprinters.

In short, PE investors are often in the race for good exit from their investments and the constant search for the next best idea.

Availability of capital is no longer an issue

Ten – fifteen years ago, capital in the financial services space was limited and without PE money, the ability to grow seemed stunted.

Not that today the capital problem has been solved. But non-banks have become much larger than some of the mid-sized private banks. Players such as Bajaj Finance, Shriram Finance and Credila are market setters for banks in some areas. With the RBI recognizing the perils of being over-dependent on PE capital in the lending space, now is the right time to act.

After all, NBFCs classified in the upper layer are expected to function like banks. Then why not have ownership structures akin to banks.

Perhaps bring in a ceiling on stake which promoters or foreign investors can hold, especially for NBFCs in the upper layer. That could put a lid on the desire to generate super-normal profits.