Opinion: Should our manufacturers be allowed to set up banks?

The Reserve Bank of India (RBI) working paper which recommends that manufacturing groups and business houses be allowed bank licences , while mapping global norms against this and disclosing that all but one of the experts consulted were against this, has generated plenty of heat. Like almost everything else right now in India, views on the issue largely depend on which side of the political spectrum you swing on policy matters. Considering the content, disclosures and manner of this idea’s presentation, it looks to me as if this is a kite flown to see what reactions emerge. The Narendra Modi government is unlikely to spend political capital on such a big change if there are enough signals that it would be a vote loser. But since the kite is in the sky, we should use the opportunity to think through the issue of letting manufacturers own banks while trying to keep politics out of it. I will outline three areas to look at this question from different windows.

But first, why do we need manufacturing groups in banking? Because India is capital starved and needs money to grow. Public sector banks (PSBs) have eroded their capital through a mix of poor lending decisions and politically-nudged free money to business cronies for the past many decades. The playbook of funding cronies with the public money of PSBs, then recapitalizing these banks using taxpayers’ money (and by borrowing), and then inflating away the debt, has destroyed the balance sheets and morale of PSBs. Private banks find retail lending more profitable and less risky than corporate lending. The flow of capital that India needs for its next stage of growth is missing. Therefore, the need for letting firms with the deep pockets required into the banking sector at this juncture. But this is a contentious issue, globally. So, how should we look at it?

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More banks won’t solve problem of credit supply

The reason that globally rules on who can set up a bank and what regulatory hoops they need to constantly jump through are much tougher than for a biscuit or a car company or even a telecom service provider has to do with the nature of banking itself. If a non-bank fails, the problem is only for the employees, the shareholders, the raw material and parts sellers and for those who liked the biscuit or car and now can’t have it. But when a bank fails, it takes down the savings and deposits of average households who trusted the bank. Worse, a too-big-to-fail entity can take down the whole system.

The report released by the Reserve Bank of India’s (RBI) Internal Working Group last week has generated a flood of opinions on why manufacturing firms should not be given a bank licence. But the issue is deeper than just that. There is a premise that expanding the number of banks and a supply of credit will fix India’s problem of being credit starved. But banks have turned risk-averse and even the existing flow of liquidity from RBI is deposited right back through the reverse repo window rather than being lent out to the non-triple-A-plus rated entities. Just expanding the supply of banks is not going to improve the flow of credit to the corporates, including the small and medium scale firms.

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Bank is safe and so are your deposits

Indian households looking for a safe space to put their money have been going from crisis to crisis in the past few years. Banks have failed, debt funds saw deep losses, and in March 2020, we saw six debt funds frozen. Even people who trusted nobody and kept cash under the mattress lost it during demonetization.

The latest story that is spooking bank depositors is the moratorium on their money in Lakshmi Vilas Bank (LVB), ahead of its amalgamation with DBS Bank. LVB is a small bank and the impact on overall banking will be marginal, but the loss of confidence in banking escalates with every crisis. And banking is all about the trust that your money will be there when you need it. Households must understand the difference between their avatars as depositors and shareholders. RBI has moved fast to announce that no depositor will lose money, that it will be available post the moratorium. The fixed deposits will be safe—the rates may change as DBS as the new owner will decide this. The losses will go to the shareholders. The share values are slated to go to zero.

There is no contagion to other banks. This is a crisis well-managed, like the earlier Yes Bank one. Shaken savers need to only look at the history of banking to understand that depositor money in scheduled commercial banks has not been lost. Your bank is safe as a custodian of your deposits. So, ignore WhatsApp forwards that tell you to exit banks. However, investors in shares of banks, and into bonds, need to understand the risk. A bank share and a bank deposit are different instruments. Don’t get mauled by the risk if you don’t understand it.

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Opinion: Covid-19 recovery: Data is telling an interesting tale

https://www.livemint.com/opinion/columns/covid-19-recovery-data-is-telling-an-interesting-tale-11605629307100.html

How does the LVB crisis impact you?

Indian households, looking for a safe space to put their money in, have been hurtling from crisis-to-crisis past few years. Banks have failed, debt funds saw uncharacteristically deep losses and in March 2020, we saw six debt funds frozen. People who trusted nobody and kept cash under the mattress, lost it during demonetisation. 

The latest story that is spooking bank depositors is the moratorium on their money in Lakshmi Vilas Bank (LVB), ahead of its amalgamation with DBS Bank. LVB is a small bank and the impact on overall banking will be marginal, but the loss of confidence in banking escalates with every crisis. And banking is all about the trust that your money will be there when you need it.

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Don’t buy into the distressed home sales story

The full-page ads are back. So are the stories in some parts of the media where “experts” are advising you to take advantage of the low interest rates and bargain basement prices to invest in real estate. The real estate corporate brokers are pushing the narrative of aisa mauka phir kahan milega (when will you get this opportunity again). You could be an entry-level buyer wanting to “settle down” with a roof over your head. You could be an ultra HNI who has exhausted his allocation into equity, debt, gold and dollars, now has a chunk left for real estate and are looking for distress deals to soak up the cash. Or, you could be a Greater Noida survivor who is beginning to forget that nightmare and is again sniffing the wind for the next boomtown story that is unfolding next to the metro line and airport. Whatever your situation, do the math before you take the leap to the other side, away from financial assets. And if you are the average Mr X investor who plans to leverage to invest—beware! There are three categories of buyers out there—which one is you?

One, the own-home buyer. Home loan rates are indeed very low starting at 6.9%. Blend in the tax break and the effective rate drops down further (exact drop depends on tax slab, interest amount and other factors). For a person looking to buy a home to live in, who does not have the money to buy the house outright and is planning to live in the city for many years, the argument holds ground. If you are going to be buying anyway, now is a good time with rates so low and property prices still very bearish. But you need to remember to keep the EMI at 30% of your take home or less. And this will mean a larger down payment than what is possible on home loans. Also remember that these are floater rates, and if inflation rates were to go up, these will go right back up. Fixing yourself down into a fixed rate loan (if available) is a good idea but these are already in the range of 8-12% and are subject to revision if you look at the fine print of the deal.

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Regulatory turf today prevents an Ant-like IPO. But things are changing

As much as $2.8 trillion, or money almost equal to the GDP of India, was available to buy shares of Alibaba Jack Ma’s Ant Group last week, making the $34.4 billion IPO, which has now run into trouble with the Chinese regulators, hugely oversubscribed. Ant is a Chinese company that began life as an escrow account to facilitate transactions on Alipay in 2004. Sixteen years later it has morphed into a gigantic multi-tentacled entity that leverages its wallet information to make loans, sell mutual funds, insurance and wealth management products, serving over a billion people. It partners with over 100 banks and over 170 asset managers, and reported an operating margin of 34% in the first half of 2020. It is mostly as much a platform as Uber or AirBnB are, but it does have proprietary offerings across credit and insurance. As the name suggests, Ant’s business philosophy rests on no client or need being small enough to be ignored. This is as bottom of the pyramid as it gets. And the treasure is equal to the GDP of the fifth-largest country in the world.

The success of Ant in serving more than a billion Chinese people and then harvesting that value on the stock market raises the question—but what about India? Why do we not have similar entities that serve a very similar demographic that regular banking has ignored for decades? It is a market where small businesses are cash starved, where the central bank has to huff and puff for transmission of credit to go beyond the best-rated largest firms. The answer has to do partly with the Chinese state looking the other way while Ant sometimes walked the grey areas of regulation and partly to do with the “if we stay in the cave, we won’t get wet” attitude of the Reserve Bank of India (RBI).

Two reasons prevent an Ant-like entity that will stitch together the entire financial life of a person onto a screen from payments, cash flow, savings, investments, insurance to wealth management. One, KYC (know-your-client) is not a one-time, portable process. It is not portable across regulators, worse it must be repeated every time one opens a new bank account with another bank. The Securities and Exchange Board of India (Sebi) has solved this problem and KYC where one part of the securities system is valid for operating in another part of the market. RBI hides behind an archaic privacy law that prevents one bank from sharing KYC information with other banks or with other regulators when they want to check the details. Of course, the same rule does not prevent rampant cross-selling of third-party products sharing bank account details to the last rupee with sharp shooter salesmen. The CKYC (Central KYC, the brain child of an UPA- 2 FM), which hoped to do the job, is useless since it just brainlessly uploads data without verifying it. This is “garbage in and garbage out” as one regulator puts it.

Two, the various regulators have their own unique ways of looking at the market and this prevents a common interface where a person can look at her entire financial life and transact on one screen. Even PayTM, where Alibaba and Ant have a large stake, is unable to give the one-screen solution due to the regulatory mess that India finds itself in, where regulators fight on turf and mostly have ignored individual needs.

But the outlook is not fully bleak if we start connecting some of the dots that are riding on the existing public goods of Aadhaar and the national payments system. Two pieces that are work in progress could change the current logjam. One, four financial sector regulators have come together to put in place an entity called “account aggregator” which is essentially a “switch” that allows data to flow between the users of and the providers of data, after getting consent from the owner of data. Read herefor more on account aggregators. This will potentially allow the owners of data to leverage their digital exhaust for their own use. The onboarding of the GSTN data will possibly solve the credit flow to small enterprises. Two, a single repository of all financial assets is underway where mutual funds, stocks, copies of bank FD originals, insurance policies, National Pension System units, bonds will all sit. A user will be able to open one screen to look at her entire financial life. A small tweak in nomenclature from “depository” to “repository”, it seems, got the buy-in from some reluctant regulators.

All this is work in progress, but if this works, India will have built a public infrastructure on which firms can build value-adds—just as we have done with Aadhaar and payments. The power of an individual losing his financial identity rests with one firm in China. But in keeping with the democratic traditions, this power will not rest with one or two large firms in India, but will be the remit of a public institution. If things go according to plan, and mistakes will be made, in two to three years, India should have not just one Ant-like firm, but several. The success of Aadhaar and payments in creating digital public utilities give me hope that the next stage of digital utilities will indeed happen.

Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation

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