08:18 June 27, 2012
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In the Media
We boast that our economy has been almost unscathed by any major scam or crisis in the financial sector. The inconvenient question never asked is: at what cost? Human lives are more important than financial losses.
Imagine we have strict motor vehicle safety regulations ensuring no accident ever happens, even if 60% of the population has no access to motorised vehicles. Or think of a toddler trying to walk, stumbling, and is injured. The overcautious mother prevents the child from walking without crutches till the age of 20. She then brags that her child, however weak, has never been hurt.
The government and Reserve Bank owe an explanation to the people of India. Why is it that even after 65 years of Independence, almost 65% of our population has no access to banking? Similarly, since Independence, our farmers' per-capita income has less than halved in relation to his non-farming urban counterpart.
Why are farmers poorer despite the government incessantly doling out taxpayers' money and deposit holders' subsidy? Why do our SMEs find it difficult to raise either equity or debt capital, despite clear focus of public policy on the same? Why do our savers hardly earn 4% and even good-quality borrowers pay over 14%?
The answers are not hard to come by. We have prevented fresh competition in the sector for fear of increased risks or due to the influence of incumbent players' vested interest, or both. The inevitable fallout has been inefficiency, neglect of low-margin customer segments, low innovation and higher pricing. This reminds us of licence raj in the manufacturing sector till the early 1990s.
Our policymakers controlled new capacity and pricing through licensing in steel, cement, edible oil, biscuits, etc, to protect customers from frauds, profiteering and poor quality. Thanks to the Saddam Hussein-caused oil crisis, we dismantled the licence raj in 1991. Today, the consumer has choice, great value and easy availability of quality products. The faster economic growth since has lifted millions out of poverty.
We learnt that a consumer gets a great product at a great price due to free, fair and fierce competition, and not because some authority is dictating the industry to do so. In the recent past, RBI has admonished banks to reduce their net interest margins (NIM), Irda has penalised higher payouts to distributors and Sebi has removed entry loads on mutual funds.
The striking exception is securities broking. Post-Sebi, broking industry is well-regulated and has flourished without any major scams as there are no restrictions on entry of new players or launch of new products. Brokers have leveraged scale, technology and innovation to bring costs down radically and reach out to customers in remote villages.
When entry to broking was restricted in the old BSE club, brokerage used to be as high as 2%. It is now as low as 0.02%. During the same period, banks' NIMs have not fallen. The exemplary growth of Indian securities broking is being emulated by many other countries. Yet, there is a proposal to be the first country to prevent brokers from even applying for a bank licence. Funnily, we have no hesitation in giving a bank licence to a foreign broker.
Banks take public deposits and need a robust regulatory framework. But that cannot be justification to deprive the growing economy of new banks. The monetary economy is estimated to treble in this decade itself. Already, we have an acute shortage, with banks not being able to reach out to almost half the population. Perhaps India needs 500 new banks today.
It may sound as ridiculous as the statement that we need 500 new cement plants or 50,000 broking terminals would have in 1991. If only five licences are available, then 2G kind of 'political influence', 'fixing' and opportunistic scrambles are inevitable. Instead of having a cautious 'open-and-shut' approach to bank licensing, we need to keep it on tap, open for all 'fit-and-proper' cases.
As long as there is discretion to give licences in a scarcity situation, scope for wrongdoing will exist: witness the fact that even the death sentence for corruption in countries like China has not prevented it. Our regulators individually are high on intellect, competence and integrity, but collectively they tend to be extremely risk-averse.
Their mandate in the founding Acts is both development and regulation, but their appraisal by the media focuses only on scams and scandals. They extensively study financial crisis and risks to make regulations tighter, but scarcely look into how banking or financial services have spread like the sunlight of prosperity and removed poverty in other countries.
They handle a heart attack-like crisis well but ignore the cancer of slow decision-making and lost growth opportunities. The time has come when they must start assessing themselves on the growth of the sector and penetration of services as much as they do on prevention of frauds.
(The above viewpoint was published in The Economic Times on June 27, 2012)
(The author is chairman of the IIFL Group)
The above article appeared in The Economic Times on Nov 5, 2011