India set to open up retail banking
Indian industrial conglomerates, including Reliance Group and Mahindra & Mahindra, are set to be given access to the country's lucrative retail banking sector after policymakers decided to drop years of opposition.
- (1888PressRelease) June 24, 2011 - Indian industrial conglomerates, including Reliance Group and Mahindra & Mahindra, are set to be given access to the country's lucrative retail banking sector after policymakers decided to drop years of opposition.
The Reserve Bank of India, the central bank, has agreed to let such groups apply for licences, according to people familiar with the situation. The move will intensify competition for domestic lenders such as ICICI and HDFC, as well as for foreign groups including HSBC and Citigroup.
The RBI, which has up to now voiced concerns about the risks that corporations could pose to the stability of India's robust banking sector, is set to release draft guidelines for the new licences in the coming weeks.
The move to open up the sector comes as New Delhi seeks to modernise its financial system to achieve greater inclusion among India's 1.2bn people, more than half of whom have no access to formal banking.
Large industrial houses were banned from banking in 1969 when Indira Gandhi, then prime minister, nationalised 14 big banks.
But the sector has been booming over the two decades since it opened up to private and foreign groups in the 1990s. Overall bank assets have grown at about 20 per cent annually and are expected to keep expanding over the next decade.
Among those expected to seek full banking licences are the Reliance Group controlled by Anil Ambani, the Bollywood-to-telecoms tycoon; Mahindra & Mahindra, which has interests from automobiles to agribusiness; and Religare, controlled by brothers Malvinder and Shivinder Singh, people familiar with the companies said.
However, the new guidelines are likely to face strong criticism from Indian civil society, as a recent multibillion-dollar corruption scandal involving government officials and business executives has raised concerns about the political influence of big corporations as well as governance standards.
Venugopal Reddy, governor of the RBI between 2003 and 2008, said the focus of debate among regulators had shifted away from whether companies should be permitted to have banking licences and had turned to the conditions of their entry.
"The likelihood that corporates will be allowed to get a banking licence is very high," said Mr Reddy. "However, the focus is another; we have to be very careful in applying the proper safeguards and rules to avoid any conflict of interest."
The RBI declined to comment. However, two of India's biggest conglomerates said they were prepared to submit to stringent lending rules to overcome any conflict of interest fears.
Reliance and Mahindra have suggested a blanket ban on conglomerate-controlled banks lending to other operations within the groups. This would address one of the central bank's most serious concerns.
Anand Mahindra, managing director and vice-chairman, said: "We think that there are ways to firewall our structures so we just don't lend to other parts of the Mahindra group".
A senior figure familiar with MrAmbani's Reliance group said it had made similar proposals on lending as well as suggesting that only groups with existing financial services operations be eligible for the licences.
India's state-dominated banking sector, while fragmented, is stable and generates high margins, according to analysts.
Moody's, US rating agency, said one of India's strengths was its "favourable funding profile, driven mainly by retail customer deposits and a minimal dependence on wholesale funding, which provides stability to the banks."
The country's biggest private sector banks, including ICICI and HDFC, have weathered the global financial crisis better than peers in other emerging and developed markets and since late 2009 have routinely reported record quarterly profits as credit demand surges.
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