FDI can keep us from going broke


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25 Feb 2013

 
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FDI can keep us from going broke

The Government has announced the licensing of new private ‘high-street’ banks with a much wider qualifying net, with up to 49 per cent foreign holding, up from 26 per cent previously allowed. This is a good thing as there is a considerable shortage of banks that lend money to worthwhile private enterprise and risk their arm with funding startups.

Presumably, there will be less official dictation on whom they can lend to, though it would be a departure from the Government’s / bureaucracy’s way if it is indeed so. They intend to let the authorities, that is the RBI, the CBI, the CBDT etc. to go into the background and vet who can qualify to be licensed. But at least all sorts of entities, including existing NBFCs, can now apply.

There will also be safeguards that will seek to prevent the promoters from taking in deposits and vanishing. Though, of course, they could always give the money to proxies to exactly the same effect. There will also be reasonable shareholding norms of up to 40 per cent for 12 years and not less than 15 per cent thereafter, so that the original promoters don’t start trading in the banks and bank licenses themselves. And good enough seed capitalisation standards too, to make sure the banks have depth and commitment.

Successful licensees will also be required to list their banks on stock exchanges within 3 years, implying some degree of public shareholding. They will also have to put in 25 per cent of their branches in rural areas that don’t have banks yet. This is a condition that is likely to prove lucrative as long as the new private banks know how to simultaneously do business with the base of the pyramid. A kind of ‘nano’, ‘micro’ or ‘grameen’ banking if you will. The Sahara Parivar owes at least some of its billions to what they call ‘para-banking’ at the grassroots level.

Private entities would be keen on the opportunity principally to access cheap retail funds and the possibility of maximising profit by lending to the best class of borrowers. So here comes Reliance, Tata, L&T, Mahindra — already in it with Kotak, and probably a host of others, including, we are told, brokers and builders.

But let us remember also that all is not well with Indian banking. Non-performing assets (NPAs) are ruling at a record high. They are up over 50 per cent year-on-year in the PSU banks at nearly Rs 100,000 crores.

Private banks tend to merge with others of their ilk when they start to go belly up. The existing clutch of private banks licensed mostly in 1993-94, provide quite a few examples. It is basically down to the big three of HDFC, ICICI and Axis presently. A dozen were licensed, including the new Kotak Mahindra and Yes Bank, as of 2003-04.

And then there are the foreign banks, led by Standard Chartered. Foreign banks have done quite well with NPAs, if not with their own risky investment and treasury-management decisions. But not so well with fraud. And banking fraud too has gone up about 42 per cent and accounts for over Rs 52 crores gone walkabout this year.

The state of our legal system, burdened and clogged by millions upon millions of pending cases, means that the perpetrators of all kinds of financial skulduggery will not come to pay for their sins in less than twenty years at a minimum. And that is only when the prosecution can construct a strong enough case and persist with it.

Actually, reform in one area cannot operate in isolation and is often bottle-necked by unfavourable conditions obtaining in another part of the system. And it is not advisable to modernise on the back of a sea of Government debt.

Our Government borrows massively, but mostly for current expenditure, salaries for its army of unsackable employees, rather than development. No country with our frustratingly bad administration deserves to carry such a huge Government on its groaning back.

And even if we did put the borrowed money to development, it is probably the wrong method of financing growth. Our erstwhile colonisers, Great Britain, have just lost their AAA rating and now enjoy AA1; a notch less.

This is probably undeserved too, because Britain owes over a trillion pounds sterling, some 70 per cent of its GDP at present. Under the Conservatives, the UK is putting in spending cuts of 50 million pounds this year, but it is still not much when the projection is that by 2016 their debt pile will have grown to 96 per cent of GDP.

No, we are much better served to attract FDI and FII to finance our growth and it is high time we realised it. Banking; bigger, better, and more numerous, can surely do its bit.


Gautam Mukherjee is an entrepreneur and former corporate executive.

(c) NiTi Digital. Reproduction and/or reposting of this content is strictly prohibited under copyright laws.


 
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  • Hari Haran

    Believe me, this govt. will leave India in such a mess and huge debts that future generations will have to pay through their noses. Unless the new govt. Re-writes the Constitution from the scratch and puts all Congress ministers / polticians into jail for the rest of their lives (including their kith and kin), plus heavy punishments to all rapists / murderers and a complete overhaul of our Judiciary, Police, CBI etc. nothing can be expected from this country.
    Lawlessness is at its peak – with political support.

  • http://twitter.com/MrTanak MrTanak

    FDI is Ok but the timing is wrong. If it was 8-10 years earlier , advantages were many but today it is ill timed. Even UPA govt. is taking steps with a an eye on 2014 elections. BSP & SP oppose the FDI in parliament and participate in discussions and also abstain and oppose and also vote for it. Times are bad for handing over the retail Management to Foreigners.

  • A

    I have a few questions on FDI, and will be grateful if someone can provide the answers.

    On FDI in retail – Why do foreign retailers want a 51% stake in companies here ? Why do they want absolute control ? It is the 1% that bothers me, I’m fine with giving them 50%.

    On FDI in auto – Japanese companies like Honda have set up their private limited concerns here, and are selling their two wheelers in billions of Rupees, why aren’t these companies listed on the stock exchanges ? They take out millions of Rupees every year in the form of royalty. Also, another Japanese company, Suzuki, which is listed (Maruti Suzuki), actually sent out half of it’s profits last year as royalty. Are the technology these companies providing so critical and expensive ? Why isn’t somebody questioning this new looting of India ?




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