Restructuring Financial Services

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The Banks in their modern incarnation have been in India for well over a century. Punjab National Bank;  State Bank of India, to name just two, could well spell out the economic history of parts of modern India. They have had also been periodically re-invented.

The more subtle changes came which the government walking the path of liberalization from the early 90’s. The changes that were ushered in that period were essentially with reference to the regulatory system, with a definitive quotient of enabling foreign investment. If there was any blue print of the recasting of the mould of the Public Sector Banks, it has been a well-kept secret.

The result has been like 2 negatives rolled in one. The rich and the powerful dominated the regulatory system before 1992 and have done so since. The result was evident in the high-jacking of banking financial resources in surrogacy of the socio-politically powerful. This is bad finance. When this was topped up with politically convenient decision, of those in public life, wanting to make it good, with the twin instrumentality of loan melas and writing off of loans, the narrative of disaster was complete.

Finance minister after finance minister were all individually brilliant enough to see the point, but  decided to keep deferring, the inevitable, fundamental restructuring the financial services of this country needed.

The cause of sanity was not helped by a confused regulatory system where the financial regulator (read Reserve Bank) continued, as it does even today, to be the ultimate lender. The repo rates, wrote the fate of many types of interest rates. In this state of blinkered and fogged vision either expertise from outside India was imported for “solution sourcing “ or those with bureaucratic background lead the hordes of financial babus. The results are there for all to see.
The time has come to search for truly desi options rooted in the potential and the logic of the economic realities of the day. Interventions like GST even if handled with economic sagacity will not alter the lay of the land of the monitory and fiscal working. They will only go so far as the taxation structure is concerned.

There is a parallel narrative, however, which has not merited the necessary attention. In 1994 HDFC started operations. 2000 it acquired Times Bank. The same year it started AMC operations; acquired stake in Gruh Finance. The fourth reason for why year 2000 would be remembered for HDFC was its entering Life Insurance in partnership with Standard Life.
 
Roughly parallelly, following the path and visioned and chartered by Vaghul,(an ex-Bank of India person) ICICI was breaking new ground. When R.N. Malhotra, then Governor, Reserve Bank, asked him to head ICICI, little did he realize the phenomena he was releasing. HDFC had a clean slate. ICICI lead by Vaghul turned the corner from a stoic frame to a vibrant financial set up. Not just insurance, it was interested  in stock broking, creating quite a potpourri of financial services. In 1996 it acquired SCICI; 1997 it acquired ITC Classic Finance; 1998 AAGRAN finance; the same year it tied up with ICICI Prudenial AMC. 2000 it was in life insurance business with prudential Plc. HDFC and ICICI were on a parallel track. Few bothered to ask what was happening to the nationalized commercial bank or for that matter even the mutual fund(UTI) which 4 of them had sponsored. The disaster which this mutual fund then met nearly shook the investor confidence to its roots.

The high jacking of a significant stream of national finance is a story widely known but discreetly avoided, because many of the active players are still active.

Financial reforms need the daring of a leopard and the sagacity of a panther. There are many wise and brave in the Indian public domain with these characteristics but the confluence of their daring and sagacity with the opportunity to contribute is illusive. In the ultimate analysis on the levers of reform are in the hands of politically powerful.

Indian financial sector will have to await for that flash point when the 3 converge to deliver it from its present ambivalence

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