Desi options, rooted in the economic realities of the day, are needed. HDFC and ICICI offer some interesting lessons
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 liberalisation from the early 1990s. 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 two 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 of India) 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 the Goods and Services Tax, 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. In 2000 it acquired Times Bank. The same year it started AMC operations and acquired a stake in Gruh Finance. The fourth reason for why year 2000 would be remembered for HDFC was for its entering life Insurance in partnership with Standard life.
Roughly parallelly, following the path and visioned and chartered by Narayanan Vaghul (an ex-Bank of India person), ICICI was breaking new ground. When RN Malhotra, then Governor of the Reserve Bank India, asked him to head ICICI, little did he realise the phenomena he was releasing.
HDFC had a clean slate. But 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. It acquired Shipping Credit and Investment Corporation of India in 1996, ITC Classic Finance in 1997 and AAGRAN finance in 1998. The same year it tied up with ICICI Prudenial AMC. In 2000, it was in the life insurance business with Prudential Plc.
HDFC and ICICI were on a parallel track. Few bothered to ask what was happening to the nationalised commercial bank or for that matter even the mutual fund (UTI) which four of them had sponsored. The disaster which this mutual fund then met nearly shook the investor confidence to its roots.
The hijacking 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 elusive. In the ultimate analysis on the levers of reform are in the hands of politically powerful.
The Indian financial sector will have to await for that flash point when the three converge to deliver it from their present ambivalence.