Allowing Corporate Owned Banks: Why should Anyone Worry?

Several Founders, Co-Founders, CXO Bankers, CXO Fintech professional & people who participated in the ePanel discussions:

Mr. Amit Sukhija, Senior VP, AU Small Finance Bank
Mr. Abhay Kulkarni, Service Management Solutions Specialist, Salesforce
Mr. Sharad Goklani, CTO at Equitas Small Finance Bank
Mr. Narayan Rao, Chief Services Officer, Suryoday Small Finance Bank
Mr. P B Prakash, Head-Financial Institutions Group, IndusInd Bank
Mr. R Bhaskaran, Strategic Training Advisor in Banking & Finance
Mr. Sugata Ghosh, Associate Editor at The Economic Times, BCCL
Mr. Himanshu Khare, former Head Corporate Legal & Advisory, VISPL
Mr. Hitesh Thakkar, Fintech Consultant, Self-Service Automation
Mr. Shashank Chowdhury, Former Executive VP- Inclusion Initiatives, Vakrangee Software Ltd
Mr. Roopesh Chandran, Director, Business Development, Visa Inc
Mr. Alok Karkera, former Head – India Public Sector & North India FI Group, Corporate Banking at Citi
Mr. Avro Mukerji, Investment Counselor- NRI Burgundy, Axis Bank
Mr. Rakesh Watal, Head Liability Operations Western Region, HDFC Bank
Mr. Abhishek Arun, Chief Operating Officer, Paytm Payments Bank’
Mr. Abhishek Mody, former Associate Director-Payment & Digital Initiatives, IDFC FIRST Bank
Mr. Rakesh Shetty, Product Head Micro Loans, Fortune Credit Capital Ltd
Mr. Vikas R Panditrao, Co-Founder, Forum of Industry and Academic Knowledge Sharing (FIAKS)
Many other CEO/CXO Bankers & Fintech professionals on FIAKS Forum requested to remain anonymous

So the FIAKS community discussions rolled around the topic- banks owned by corporates. If you see IndusInd bank is owned by Hindujas. Kotak Mahindra Bank has corporate Mahindra in the name itself. So, the question here is Why should anyone have a problem with the entry of corporates into banking?

Member states, “Kotak may not be an ideal companion since he doesn’t have to fund a business conglomerate and Mahindra has a very small stake. But what I found interesting that while RBI is pressuring Kotak to reduce his stake, it is actually his stake that has helped keep NPA low. He knows that a portion of every NPA hits his pocket directly due to his high stake and business decisions have been taken accordingly.”
Well, names are not relevant. Associated businesses which can have an undue influence on loan sanction are what is being debated and feared. However, looking at the current situation even not having business associates can lead to vested interest playing a role in banking.

If an NBFC or a financial house can promote or become a bank why not an industry?

With an enormous number of regulations and norms and given that non-compliance to norms can lead to complications including closure/merger of banks it is time to recognize that banks need strength beyond capital namely the ability to raise capital in case of need. Therefore industry houses could be considered. Frauds and mismanagement is not an exclusive character of corporates. Recent bank failures clearly demonstrate this!

Why should anyone have a problem if regulatory authorities are allowing say Infosys bank or Tata bank or L&T bank or Adani bank, etc to be formed? What’s the concern?

A member states, “As of today I wonder whether RBI has the supervisory bandwidth. Even as they are struggling with existing commercial banks, they will now have to supervise over 1000 cooperative banks. I feel effective supervision also becomes difficult if influential owners come in the way.”
Concerns regarding transparency. Also, the concentration risk. If the business fails it may spill over to the bank sparking a contagion (though ideally shouldn’t happen as banking is highly regulated).
Then, such banks will give loans to corporate who is borrower as well as the owner of a bank. As it is bad loans comes out very late, this way it will only create more delay plus bad loans.
Application of ‘Caesar’s wife must be beyond suspicion’ principle? As these corporate conglomerates are in various capital-intensive industries, having borrowed from various banks, there may be a concern that as a bank they may dole out preferential treatment to their own group companies diluting prudent practices like arms’ length principle, conflict of interest, etc. Thus access to cheap public funds may get misused for the unfair benefit of their own other businesses
India is a trust deficit country and most corporates don’t exactly have any stellar reputation. Most people will even find it difficult to trust the management of a lot of companies to have Chinese walls, arms’ length, have fiduciary responsibility while managing someone else’s money plus one bad apple will bring disrepute and pain to anyway poor consumer/citizen. Do note that 90% plus people earn under 10k in this country.
It’s another matter that even with the current set of banks, there have been enough & more cases of conflict of interest, collusion/connivance bet’ bank officials & borrowers, besides RBI’s own penchant of finding no fault ever with its own supervisory, audit responsibility!
While another member mentions, “There are regulations on lending to related parties, single exposure limit, and group exposure limit, they should adequately address the doubts about their lending practices. I personally don’t see any issue with corporates on banking as the regulations and supervision will more than take care of the concerns.
A member mentions, “maybe Tirupati Devsathanam, Vaishnodevi Devi shrine, and Satya Sai baba trust should float banks. They can hire professionals, they will be regulated, and will be easy to attract customers. Another example Jaypee group – would have applied for a bank license or even the Sahara group in their heydays. And I am sure they would have got it because they for sure had money, resources, and all the right people backing them.”