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A financial expert says that smaller entities with emphasis on good corporate governance, high-quality lending and low-cost structures can help to provide banking to low-income groups
Small finance banks need to be set up in order to achieve the government’s objective of making available banking services to low-income groups at an affordable cost, a leading financial sector expert has said, reports PTI.
“We need to fall back on the commercial banking model for seeking a satisfactory solution to the problem of increasing financial inclusiveness. Setting up of small finance banks that will have linkages both with big banks as also with small entities will help in widening access to retail clients,” said RH Patil, chairman, Clearing Corporation of India.
So far, the concept of small banks has not found favour due to the unsatisfactory track record of many existing small banks which have poor governance structures, excessive government and political interference, and unwillingness of the regulator to undertake prompt corrective actions, he said.
“But compared with other options like co-operative banks or the Regional Rural Banks, the proposed small finance bank model will prove to be a far better choice,” he said.
There should be strong emphasis on good corporate governance, high-quality lending and low-cost structures for these banks, Mr Patil said.
“Given the nature of their asset portfolio, it is necessary to stipulate a strong capital adequacy ratio. To begin with, each bank should have a capital of at least Rs200 crore so that only relatively strong candidates jump into the fray,” he said.
Mr Patil said that small finance banks should essentially be like regional area banks, with their area of operation well defined at the time of granting them a banking licence.
Up to four-five candidates may be considered for grant of small banking licences in any region. “Licences could be given to NBFCs which already have a good governance track record in areas such as housing finance, retail business and leasing, and industry or corporate houses with a good governance track record,” Mr Patil said.
With regard to NBFC applicants, the Reserve Bank of India needs to be particularly careful in its scrutiny as the experience so far has not been “uniformly satisfactory”, he said.
While these banks would be pursuing mainly the inclusiveness agenda, they need not be precluded from having a small part of the business in favour of large clients so that it is possible for them to have cross-subsidisation in favour of smaller clients, he said.
Young CEOs and executives must help to take the country to the next level, says P Chidambaram
Having shrugged off the impact of the global economic crisis, India appears poised to overtake China’s high growth rate in the next ten years, said home minister P Chidambaram.
“While the last decade was remarkable and exciting, this decade will be more exciting for India. There is more possibility that India could overtake China's growth rates,” the minister said at a function last night.
China, the world’s sixth largest economy, has recorded an average 9% growth over the last two decades, while India has seen growth touch 9% only in the three years till 2007-08. But the global financial crisis ate into this progress and growth slipped to 6.7% in 2008-09.
The Planning Commission, at its meeting chaired by prime minister Manmohan Singh earlier this month, scaled down India’s growth target for the 11th Five-Year Plan period (2007-12) to 8.1% from the previously estimated 9%.
“We are young and will continue to grow. Corporate India will continue to grow in the current decade. The young CEOs and executives must help to take India to the next level,” said Mr Chidambaram.
The minister’s confidence also stems from the fact that Foreign Direct Investment inflows— key to growth—have been increasing rapidly, although they slowed down during 2008-09 at the height of the financial crisis.
Mr Chidambaram also said that India will “become a part of the United Nations Security Council in this decade” and added that there was a need to make India a secure place so that the country's economic growth remained unblocked.
“There was a fear, but it is over. We are marching ahead to compete with others in every aspect,” he said.
Mr Chidambaram said that human resources will not be a burden for India in this decade—they rather prove to be an asset.
The foreign entity had spent Rs213 crore in June 2006 for a 37.5% stake in the Murugappa Group’s non-banking finance company
Development Bank of Singapore (DBS) had spent Rs213 crore to buy 37.5% stake in the Murugappa Group’s non-banking finance company, Cholamandalam Investment and Finance Company Ltd, in 2005-06. Yesterday it exited from the joint venture at Rs129 crore, making a straight loss of Rs83 crore.
This is not the first time when a foreign company which has jumped into the Indian financial sector has burnt its fingers. Earlier, mutual funds companies (like Threadneedle), broking companies (James Capel, Peregrine) and banks (BNP Paribas) have entered into India and exited at a loss. Some of them like BNP Paribas find India irresistible and have come back again.
According to a news report in 2005, DBS announced that it would spend about Rs228 crore to acquire 37.5% stake in the company. It actually acquired 142,21,985 shares at Rs150 in June 2006 as per its filing to the Bombay Stock Exchange. It was a strategic stake sale for Cholamandalam as well. The Murugappa Group was planning to gradually exit the financial services business and focus on fertilisers and other manufacturing activities.
A few months ago, both DBS and Cholamandalam sold their stakes in DBS Cholamandalam Asset Management to L&T Finance for Rs45 crore. It remains to be seen whether the Murugappa Group would like to invite another foreign company into Cholamandalam Finance for another round of musical chairs.
The music starts during a market boom when foreign companies suddenly focus on India as the next hot destination. DBS partnered with Cholamandalam to grow the personal finance business, asset management business and also the banking business for which it launched 10 branches. After the collaboration, the foreign partner was expected to grow the financial services business by using its expertise in retail loans. But in a script that plays again and again, DBS on Tuesday announced that it is exiting from the joint venture with Murugappa in Cholamandalam. The reason was major delinquencies in the personal loan portfolio. In September 2008, after a huge hit to its portfolio, it had decided to stick to vehicle financing and loans against shares. In May 2009, the company was forced to create a provision of Rs200 crore against bad loans. Almost 75 branches across India were closed down and 200 employees were laid off.