If you only read the multiple, interesting and expert responses to RBI’s recent Internal Working Group report that targets higher banking competition, you could be forgiven for believing that Indian banking doesn’t need radical change, that most Indian entrepreneurs deserve their own episode in Netflix’s Bad Boys Billionaires, and that banks are only safe in the hands of employees or foreigners. Demonising Indian entrepreneurs not only excludes capital but encourages the possibility of Indian banking becoming like Wimbledon; it is played in England but Britishers rarely win. Shouldn’t building big Indian banks be an important strategic priority when five of the world’s top 10 banks are Chinese? As Poet Ramdhari Singh Dinkar wrote: Kshama shobhiti us bhujang ko jiske paas garal ho (Benevolence only befits snakes that have venom).
Whatever is finally done — the recommendations are open for public comments — any debate must openly consider the painful status quo, the tyranny of technocracy, and the possibilities of entrepreneurship.
Ending the poor productivity and wages of our MSMEs, self-employed, and farmers, needs rebooting Indian banking. The credit to GDP ratio has been stuck at 50 per cent for 10 years (most developed countries are 100 per cent), the number of scheduled commercial banks is lower than in 1947, net interest margins are among the highest in the world, and bad loans have been over Rs 10 lakh crore for a decade. Over the last few decades, we fixed the big NBFC problem of “too-retail-to-fail”, but the last few years suggest a “too-wholesale-to-fail” problem that needs reviewing their regulatory arbitrage. Weak competition for new banking business — deposits and loan concentration has increased by 70 per cent in the last five years — means that our version of “too-big-to-fail” is “too-few-to-fail”. And current banking problems can hardly be the fault of entrepreneurs currently not allowed. India cannot accelerate its economic growth or counter China’ economic-growth driven militarisation with the current structure, management, ownership, governance, regulation, and supervision of banking.
Over the last few decades cognitive experts — an elite global minority of educated, articulate, and connected professionals to which I belong — have provided important ideas. But we have become less mindful about the unintended consequences of theory and less open to the messiness of change because of our self-image as society’s fire alarms, seat belts, or life insurance. COVID exposes the dangers of certainty because, first, science progresses through the iterative hypothesis testing of debate, disagree, pivot, and reassess that can’t prove anything right but proves things wrong. Second, all prescriptions are based on the best available data and will change as inevitable new evidence emerges or relationships change. Third, science is better at addressing the technical problems of the physical world rather than adaptive or wicked problems of the human world. Unfortunately, the tyranny of technocracy — they prefer the impossibilities of democracy without politics and markets without business — is higher in social sciences like economics. Maybe because economics isn’t a science. Nobel Laureate Richard Feynman wisely reflected that physics would be impossible if electrons had feelings.
It’s important to remember that the report has many thoughtful recommendations beyond the question about entrepreneur shareholders. And their question does not deserve suggestions of suspicious timing (why now), conspiracy (who for), dyslexia (we can’t improve supervision), fatalism (we won’t improve supervision), and contested history (fraud, not ideology, drove nationalisation). The notion that financial institutions with tiny shareholders, professional management, and boards that ban shareholders are infallible ignores Indian evidence (most recent financial accidents involved institutions that don’t have entrepreneurs and met current ownership guidelines) and global evidence (foreign banks idealised in the current debate made losses in the 2008 financial crisis that exceeded all profits made since the Medicis invented banking in 15th century Florence). This blind spot is the agency problem highlighted by the new book, Lights Out, about two CEOs at General Electric where a new board member’s question to a tenured member about the role of the board of directors gets the unforgettable answer of “Applause”.
Clearly, all models of ownership and governance have bugs and features and none is perfect. But reactions to the report suggest that we Indian entrepreneurs need to introspect about perception and trust. However, questioning the motivations of RBI’s working group in raising questions is unfair, implying that Nirav Modi and Bhushan Steel represent most Indian entrepreneurs is using drunk driving as an argument against cars, and believing that most Indian entrepreneurs don’t care about honour, stakeholders, and purpose, seems ideological. Nothing unnatural about being ideological — the great new book Jugalbandi by Vinay Sitapati of Ashoka University has the wise Atal Bihari Vajpayee quoting Jaki rahi bhawana jaisi, Prabhu moorat dekhi tin taisi (a devotee sees God in the image he wants to see).
Fixing Indian banking needs luck and skill. Skill will come from foreign banks (DBS takeover of LVB), foreign public investors (HDFC is 70 per cent owned by foreigners), foreign private investors (Catholic Syrian Bank Fairfax investment), four public sector banks (with an independently governed holding company that has no access to government finances), and a revamped RBI (a higher game in regulation and supervision through organisational structure changes, specialisation, performance management, training, and technology).
The “luck” question is more complicated. The British psychologist Richard Wiseman suggests that lucky people are outgoing, and are more open to new experiences, talking to new people, and traveling to new places. They smile twice as often, make more eye contact, and are optimistic. The RBI working group — staffed with people of talent, integrity, and imagination — seems to have intuitively understood Wiseman and challenges us to shift Indian banking to being open, big and inclusive from its current closed, small and exclusive form. No change is finalised, but let’s have an open debate without canceling the question.
This article first appeared in the print edition on December 8, 2020 under the title ‘Banking on status quo’. The writer is with Teamlease Services. Views are personal