RBI moves smooth from licences to MFIs to liquidity

Will Big Boys own banks?
Why does every business house want a bank? Well, there aren't too many businesses that enjoy a near monopoly as well as a subsidy. Banks have a predominant share of savings, and can borrow from RBI whenever money is tight. Even if the bank fails, the regulator will find a buyer.

Some fear that a corporate owning a bank may misuse it; temptations to tap a home bank can be irresistible when funds dry up. And overlending to group firms, say in a circuitous way, will eventually bring down the bank. The fears, corporates argue, are exaggerated. No group will ever risk its reputation with funny loans. The debate has been raging for years.

Now, there is feverish lobbying for new banking licences. Chances are that RBI may have to finally open the door to corporates. The regulator may well have a secret list of those it thinks should not control a bank. Its skill will be tested in framing a policy that will keep them out.

How to salvage microfinance?
At some point in the SKS fiasco, the microfinance institution (MFI) could have ended a lot of its troubles by cutting a quick deal with former CEO Suresh Gurumani. Today, the situation has slipped well beyond that. The whole industry is crippled by a stifling law passed by the Andhra Pradesh government.

Even if SKS finds a way to stay afloat, many other firms will sink. MFIs are facing reluctant bankers, crafty politicians and a hostile press. There are concerns that a bankable model of funding poor women is about to collapse. Some hope the crisis will end as political stability returns to Andhra, the base for large MFIs. Others fear uncertainty may linger.

Perhaps, the only institution that can salvage MFIs is RBI. If the central bank acts as the regulator, ask MFIs to register with it and lay down new rules like capping CEO salary and foreign investment limits, MFIs will have a ring of protection. But will RBI dirty its hands?

When will liquidity return?
The problem has a strange origin: the government received more money from spectrum auctions than it could spend. As funds flowed out of bank accounts of telecom firms to the government's account with RBI, over Rs 1 lakh crore was no longer available for lending.

As the government had no plans on how to spend it, the money stayed parked in the RBI account as the market gasped for funds. Fearing inflation, RBI refused to pump in money. Banks raised interest rates to attract deposits, scrambling for funds in the same money pool that hardly grew.

The next six months could be tough for RBI as demand for loans peaks. Money may not return in a hurry. Even if government quickens spending, it will take months before money to return to the market. If RBI buys bonds to infuse money, it will have to do it in far bigger doses to calm markets. And later, it will have to find a way to soak up the extra liquidity.