‘Cash transfer no low-hanging fruit for banks’

Naina Lal Kidwai, president of the Federation of Indian Chambers of Commerce and Industry (Ficci) – apart from being the India head of HSBC – says consolidation in the banking industry is a necessity, backing the finance minister P Chidambaram’s call. In this first of a two-part interview (given in her role as the Ficci chief) with Megha Mandavia, Parnika Sokhi and Raj Nambisan, she dwells on what’s in store for the banking sector:

What is the view of the corporate and banking sectors on cash transfers?
It’s very positive. We have to go to a regime where money finds its way into the right hands. The scale of cash transfers will be lower initially because large swathes of India’s population are unbanked.

But it looks like a prized duchy  -- a big float business for banks…
I don’t think so. It will be more of a service to the nation. How much float do you think can come from someone who needs the cash for his daily bread? That beneficiary is going to withdraw all the money. I don’t think it is going to be a money-making proposition initially.

You say initially…
If years down the line, the individuals who are beneficiaries begin to keep money in deposits, then you will see the float. Right now there’s no low-hanging fruit … it’ll be more of a transaction. Interestingly, banking models elsewhere are shifting to online from brick & mortar, but we will be going the other way.

The finance minister has called for consolidation in banking? But we have seen the too-big-to-fail issues in the west…
It has to happen. We are nowhere close to too-big-to-fail. We don’t have a single big bank in the global top 50. Even the State Bank of India barely makes the cut. My bigger worry is that the banking sector is not growing in tandem with the needs of our industry. With 70% of it in government’s hand, there’s no capital to nurture that 70%. And to rely on the fisc in order to fund isn’t right. The government needs to take a call at some stage whether it needs to own all the banks, or if there are some that it can let go and focus on just a few big ones. It needs to enable some consolidation and allow the big banks to emerge.

Is this just about balance sheet size? Will they be efficient?
There’s no reason why they can’t be. There are many big efficient banks globally and we are very far from the scale. We have one bank in the global top 100 and that too in the 70s. China has 6 in the top 20. We can do a lot better because scale affords advantages of technology and delivery. I am not saying the world’s biggest bank needs to be Indian but we can certainly have more big banks in the top 100. Some consolidation is important. New banks will bring new technology. They may operate in specific niches like agriculture and speciality skills. New banks can bring representation to parts of the world where there is none.

A pure agri-bank? Is there one around?
It’s about a bank that understands the complete agricultural process. There’s Rabobank, for instance..

Isn’t that a cooperative model…
That’s fine because it works. They have a model which we can learn from. Banks are a huge knowledge base on what is working. Banks can handhold foreign partners/companies to India.

Will this be some kind of scaling up of RRBs?
RRBs (regional rural banks) are a whole different story. I don’t know many banks have the appetite to work through an RRB.

So a corollary to the RRB system?
Could be. I don’t know. The opportunity for a bank to set up in spaces it understands and works with other parts of the world is for real. For example, if China is your trading partner ... for Chinese banks to be here is an opportunity. So when new banks licences are given, there are spaces new banks can help grow the banking sector in India as a whole. We need a big robust banking system that can support India’s growth aspiration.

I am not saying it has to necessarily be an agricultural bank. It can be a bank which does 40% of the business in agri-business, or trading in agricultural commodity because that’s the business they understand the best because they do it in Brazil or Thailand or wherever. It’s a function of expertise, about bringing in technology and skills different to what we have. That will be helpful.
There is no harm in looking at a diverse stream of players that helps India with trade ties, with technology and other offerings. They can be small banks as long as they are well capitalised. Let’s not forget the NBFCs and the role they have played bridging the gap from where the banks stopped. And the ability for these NBFCs to either capitalise themselves and get into the mainstream by getting licences is also important. The RBI will also be more comfortable with that because they can now regulate them.

How many licences will/can be given?
Who knows? The RBI will rightly be cautious because to establish the rule of fit and proper will be very important.

Coming to foreign banks, the wholly owned subsidiary model remains a discussion paper. What’s holding that up?
The main issue is tax and the clarifications around it, such as grandfathering of capital gains tax, stamp duty ... those sort of things. It looks like they are getting resolved. And it is up to the RBI to suggest what level-playing field needs to be set out because ultimately the desire to have a wholly owned subsidiary that looks like any other private sector bank is, I think, the norm to aim for. That clarification is really what is holding things up.