In an exclusive conversation with CNBC-TV18’s Shereen Bhan, he said that achieving a return on equity (RoE) of 15-20% is key to PSU banks’ success provided they are granted greater operational freedom.
These are the verbatim excerpts of the interview.
Q: Speaking about regulation keeping pace with innovation, as far as the banking sector is concerned, two questions as we look at the next 25 years. Do you believe that regulation should allow Fintech, for instance, to be able to get a banking licence? The founders of Zerodha, in their conversation with me, said we want to be a bank. If we could apply for a banking licence, we would do it tomorrow. Do you believe that that should be something that we consider as we go forward? Two, allowing corporates into the banking sector has been much debated. Do you believe it’s time to consider that possibility?
A: We need to understand this whole question from the perspective of the regulator. The regulator’s primary purpose on the banking front is the safety of deposits. So when the regulator feels that there is comfort in FinTech or Digitech coming in and becoming a bank and taking deposits for which finally a bank or the regulator is going to be responsible, then they will allow this to happen. So clearly, it’s a transitionary process. So as that confidence builds up, that change will happen.
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Q: What does your gut tell you?
A: To be very frank, it needs a little more time because I am seeing signs of rash behaviour. I am being very frank about it on the part of digitally driven enterprises the regulator will have to manage it with great care.
If you look at it as a banker, if a regulator says that on retail unsecured lending, I have to increase risk weightage by 25 basis points (bps), to me it is a signal. Or if another regulator says that 90-95% of F&O transactions are where people have lost money, and maybe 60 entities on the other side have made money – and this funding has come from where? It has come from somewhere within the financial system, and they are not Amber flags, they are red flags all over the place. So the regulator has to be careful.
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In the context of corporates, there is a different view that was there. These things that I mentioned will be relevant. But also, is there going to be lending to self? So the regulator has to be comfortable with these things before it proceeds. But to me, their first step is bulking up of existing players.
Q: Is there room for the privatisation of banks over the next 25 years? Do you believe that there is political will or political capital even though we have got the legislation in place?
A: I don’t want to go down the route at all. What I will say is if public sector banks are going to run a return on equity (RoE) of 15-20%, they should thrive. So why should they need to privatise them? Give them more freedom, but make sure that your RoE is 15-20%, to me, that is the Holy Grail.
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