RBI, drop this risky move

RBI, drop this risky move

The risks associated with allowing corporate ownership of banks are many

Reserve Bank of India logo. Credit: Reuters Photo

The proposal of an internal working committee of the Reserve Bank of India (RBI) to allow large corporate bodies and industrial houses to promote banks in the country is a matter of serious concern. The committee was set up to examine the licensing and regulatory guidelines for private banks and its proposal has attracted much opposition from various quarters. The RBI has never been generous with banking licences, and past licensing guidelines have allowed only a few private banks with no links to business and industry. There has even been an explicit bar on large industrial houses entering the banking sector. But there seems to be a rethink now, and that does not seem to be in the best interest of the banking industry and the financial system, and the economy in general. The concern has been aggravated by the fact that the economy is much more vulnerable now than in the past. 

The risks associated with allowing corporate ownership of banks are many. There is a possibility of depositors’ money being diverted to corporate houses and businesses linked to them. The standards of corporate governance are not high in the country even with all the laws and regulations and oversight by many bodies. Banks have also resorted to malpractices and favoured parties with dubious credentials with loans, creating NPAs and endangering depositors’ interest. The Vijay Mallya and Nirav Modi experiences are only recent. When businesses themselves control banks, this risk will be heightened. Risks like inter-group lending and the contagion spreading from corporate failures and defaults to the banking sector will be very real. Industry and business are the biggest clients of the banks now and the health of the sector depends to an extent on them. To give them controlling interest in some banks is not advisable at all. Overall, the proposal, if implemented, can lead to conflicts of interest in banks and concentration of power and greater systemic risks. 

There are not enough checks and balances in the financial system to minimise damage and avoid collapses. Five banks or major financial institutions have failed in the country in the past two years, the latest being Lakshmi Vilas Bank. Regulatory oversight is not always at its best. Very often, a failure or problem is detected only after it has occurred. It should be noted that the working committee's recommendation is not unanimous and three former RBI governors have opposed it. There is the need to expand banking in the country, which is even now largely unbanked. Private sector banks will have an important role in this. But the recommendation which will introduce cronyism into banking is not the solution and it should be dropped altogether.