Banking licenses for corporates : Strategic analysys with the Japanese Keiretsu system

Abstract

The Government of India recently passed the Banking Laws (Amendment) Bill 2011 which allows corporates to apply for banking licences. Corporate houses such as Reliance, Aditya Birla Group, L&T, IDFC, IL&FS, Religare, which typically have some form of Non Banking Financial Company (NBFC) currently, have evinced interest in applying for these licenses. Our analysis examines how the strategy of corporate houses could evolve when they have their own bank to fund their investment needs. The Japanese Keiretsu business methodology is examined to relate how Indian corporates might change. The Keiretsu is set of companies with a bank at its core surrounded by numerous companies with interlocking business relationship as well as shareholdings. For example, Mitsubishi group is a keiretsu with companies in more than 25 industries such as Nikon cameras, Kirin beer, Asahi glass, Fuso trucks, Mitsubishi cars etc. with the core being the Bank of Tokyo-Mitsubishi UFJ. The Group companies typically rely on the bank for their funding needs. The Bank also nominates its senior management on the board / management structures of these companies. This relationship builds trust ensuring that there is little information asymmetry thereby reducing the bank’s risk exposure. The companies also have assured funding for their needs with minimal costs involved in procuring as well as in further transactions on them. The bank adheres to the rules of the central bank but just might prefer to lend their group companies. Thus, the public investor, depositing their money with the bank, need not worry about who the bank lends to as long as the bank meets the central bank’s stringent regulations and generates the assured returns for them. In the Keiretsu context, the strategic advantages of having an own bank for an Indian corporate house are examined. L&T group is considered as an example and is analysed to understand gains it could acquire in having its own bank. L&T being a diverse group with high exposure to infrastructure projects, external funding becomes crucial to complete them while revenues typically take years to materialize. Kingfisher Airlines is used to illustrate the problems of independent banks financing based on backing by cash cow promoting group company United Breweries. In conclusion, Indian corporate houses adopting the traditional Japanese keiretsu system entirely especially with respect to group companies cross shareholdings instead of a holding company may never be accomplished. However, the advantages of having a bank at the nucleus of the group are very high to ignore. Corporates which eventually succeed in getting banking license will ensure that their bank’s management plays a significant role in the management of their group companies over time