Updated: November 12, 2020 8:39:52 am
The Ant IPO drama last week captures the success and challenges of China’s 200-year quest for fuqiang (wealth and power) via fuxing (rejuvenation), described by using the thoughts and lives of 11 Chinese writers, activists and leaders in the book Wealth and Power by Schell and Delury. The success is remarkable. In the last 200 years of high finance, you had to be Western to be Modern. Chinese stock markets had been closed for 41 years after the communist revolution in 1949. Yet, the largest IPO in history happened outside New York and London — the $3-trillion worth of applications for the Ant IPO equal India’s GDP. But regulators cancelling the $35-billion IPO 48 hours before stock trading, captures the challenges of reconciling communist rule with free markets, entrepreneurship, and status quo challengers. I make the case that the global economic gravity shift to Asia combines with China’s contradictions to create a unique opportunity for more financial institutions with an Indian “centre of gravity”.
The weakness of my “Indian” argument was exposed by three formidable questions from my mother about my Indian car desire when I replaced my Japanese workhouse with a spectacular Tata Nexon electric last week. Don’t you have an Ambassador? Have you forgotten patchy Indica quality? And what do you mean by an Indian car? The Ambassador question was easy — nostalgia beats logic. But nostalgia can’t be trusted for long rides, and Ambassador is bankrupt because animals bred in captivity can’t survive in the jungle. The Indica question was also easy. Companies learn from experience just like plane crashes improve air traffic safety; Tata Motors couldn’t compound learning over decades because multiple car licence applications were rejected in the 1960s, and their learning has exploded with the Jaguar/Land Rover acquisition.
The toughest question was “What is Indian?”. Is Tata Nexon an Indian car despite imported components? Is HDFC an Indian bank despite being majority-owned by foreigners? Does Suzuki making more than half its cars in India make it an Indian company? Does Lupin with 30 per cent of its revenues from India still make it an Indian company? Does Satya Nadella as CEO make Microsoft an Indian company? Does IBM having more employees in India than in the US make it an Indian company? Does Hindustan Unilever’s gigantic stock market value make Unilever plc an Indian company? It’s no longer simple, useful or insightful to classify company nationality by profits, revenues, management, shareholding, supply chains, or headcount. But it’s clear that Tatas, HDFC and Lupin have their centre of gravity — or what Sanskrit delicately calls sthanabalam — in India.
The case for more financial institutions is simple. India has labour (100 million workers should evacuate farms) and land (giving every household half an acre would fit into Rajasthan and half of Maharashtra) but not enough capital. The case for foreign financial institutions is also simple — their technology, processes, and experience raise everybody’s game. India is open — foreigners own 25 per cent of public equity, 90 per cent of private equity, and Google and Walmart are UPI’s biggest volume contributors. India’s challenge over the last 10 years has been bank credit. Credit-to-GDP ratio is stuck at 50 per cent, banking concentration measured by flow has increased by 70 per cent, and bad loans exceed Rs 10 lakh crore.
The case for “Indian” lending financial institutions is strategic. Foreign institutions are unlikely to lend when needed most and lend to small enterprise borrowers. Bank numbers have practically remained unchanged since 1947 despite world-leading net interest margins. Nationalised banks that have an eight-times higher chance of bad loan accidents, would save Rs 35,000 crore annually with industry benchmarked productivity. The 2007-8 global financial crisis suggested that banks are global in life but local in death; regulators prioritise domestic stakeholders. The home bias for global bank lending is accelerating. UPIcrossing 2 billion monthly transactions demonstrates how mandated interoperability, local innovation, and enlightened regulation help insurgents take on incumbents. And Chinese soft power is surely enhanced by five of the world’s 10 largest banks being Chinese, 19 of the top 100 banks being Chinese, and 40 per cent of external sovereign debt of the 50 most indebted countries owed to Chinese institutions.
More “Indian” lending financial institutions need five changes. The biggest impact lies in creating a nationalised bank holding company that replaces the Finance Ministry’s Department of Financial Services, has no access to government finances, and is governed by an independent board chaired by Aditya Puri, Nandan Nilekani or N S Vishwanathan. We must licence 25 new full banks over 10 years. We must expect and empower the RBI to deal with bank challenges earlier, faster, and invasively, by reimagining post-mortems, granting listed bank capital induction flexibility and making regulation ownership agnostic. We must explore new eyes for banking supervision that include differential deposit insurance pricing. Finally, financial stability and innovation are not contradictory; let’s blunt regulatory barriers between banks, non-banks, and fintech because, as Jack Ma of Ant Group wisely suggests, an airport can’t be regulated like a train station.
Indian entrepreneurs don’t need protection. They need freedom. Our remarkable tech companies like TCS, Infosys, Wipro, Sun Pharma, Biocon and Lupin demonstrate the power of competition, ambition, and persistence. And the stock market rerating of domestic consumer companies like Brittania, Marico, Pidilite, and Dabur demonstrates the impact of “foreign” company alumni. The best case for combining openness with an Indian centre of gravity comes from Gandhiji: “I don’t want my house to be walled in on all sides and my windows to be stuffed. I want the cultures of all lands to be blown about my house as freely as possible. But I refuse to be blown off my feet.” The post-Mao Chinese communist party strategy of “fill their stomachs but empty their minds” has delivered incredible prosperity but has irreconcilable disagreements with the individuality or ekla cholo re of entrepreneurship. The opportunities for India arising from the coming Asian century, China’s contradictions and China’s new inward focus strategy come not once in a decade but once in a generation. Let’s empower our financial services entrepreneurs to exploit this opportunity.
This article first appeared in the print edition on November 12, 2020 under the title ‘The case for Indian lending’. The writer is with Teamlease Services
📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines
- The Indian Express website has been rated GREEN for its credibility and trustworthiness by Newsguard, a global service that rates news sources for their journalistic standards.