Banking must expand rapidly to support India’s economic goals

Context: Reserve Bank of India’s working group has published its report on opening up the banking sector, given there are checks and balances to ensure systemic stability.

4 Broad Themes in RBI’s Working Group Report:

• Creation of a Holding structure for overall Governance: Holding companies for banks need to be created at the earliest. It will help ring-fence their identity
• Dilution of Equity in banks by Promoters: It has adopted a pragmatic approach of keeping a 15-year horizon before the promoter’s equity can be diluted, and
  • The eventual equity cap has also been raised from 15% to 26%, ensuring continuity in management.
• Managing the growing Non-Banking Financial Companies: They have become systematically important, and their failure needs to be prevented, suggesting a tighter supervisory structure and enabling legislation.
• The entry of Corporates in the Banking Sector: It suggests a corporate entry when consolidated supervision can be tightened further, and when the legislative regime is right.
• India’s banking system is a mere 70% of the GDP, as against China’s whopping 170%.
• India’s economy needs to grow four-fold in the next decade to meet its aspirations. To match with the economic growth, India’s banking system needs to grow eight-fold.
• Acceleration to support growth and removal of inefficiencies in the public sector banks can either come from existing players or new entrants.

Conclusion: Since India must broaden and deepen its financial system to achieve its national goals, we need to seriously consider letting corporate players in, albeit once appropriate checks and balances are in place to ensure systemic stability.