Proposal to allow corporates into banking a bombshell: Raghuram Rajan, Viral Acharya

We would argue no.

Former RBI governor Raghuram Rajan and former RBI Deputy Governor Viral Acharya have, in a blogpost titled "Do we really need Indian corporations in banking?", strongly criticised the RBI report, asking whether there is any need to open up the banking sector to corporate houses now; what new information has prompted a need for a change in our bank-licensing guidelines?

The approach of the RBI regarding ownership of banks by large corporate/ industrial houses has, by and large, been a cautious one in view of serious risks, governance concerns and conflicts of interest that could arise when banks are owned and controlled by large corporate and industry houses.

Addressing a press conference, Chidambaram said the principles governing banking that include broad-based shareholding, strict separation of ownership and management entailing ownership with shareholders and management in professional hands and prohibition of connected lending; building a wall between lender and borrower will be undermined if corporates and business houses are allowed to set up banks. "Even an independent committed regulator, with all the information in the world, finds it hard to be in every nook and corner of the financial system to stop poor lending", the article said. "Information on loan performance is rarely timely or accurate", they said in a note. "Yes Bank managed to hide its weak exposures for considerable periods", the post pointed out.

Rajan and Acharya in a note have questioned the timing of the move stating that nothing has changed to warrant a change in the stance of the RBI to deny bank licences to corporate houses.

"Moreover, highly indebted and politically connected business houses will have the greatest incentive and ability to push tor licenses".

"That will increase the importance of money power yet more in our politics, and make us more likely to succumb to authoritarian cronyism". "India has seen a number of promoters who passed a fit and proper test at the time of licencing turn rogue", Rajan and Acharya add. "Whether these conditions will always pertain is debatable". The entities will start with a big bank, but if the banks fail, the cost to the exchequer would be significantly larger than for banks floated by others. "Is there some dramatic change in perception that it is responding to?" the former supremo and Deputy of the RBI asked.

The former RBI officials also point out that the Internal Working Group or IWG itself notes in its appendix that a majority of experts consulted by the panel were of the opinion that large corporate groups and industrial houses should not be allowed to promote a bank - and yet the final recommendation made by the committee is the opposite.

"Yet it recommends change!", they pointed out.

They add that if the RBI aims to bring in more managerial capabilities, the central banks already "allows business houses that don't have more than a certain fraction of their business in non-financial enterprises to apply for a bank licence".

"If sound regulation and supervision were only a matter of legislation, India would not have an NPA problem", they added.

It would also be a mistake to sell public sector banks to industrial houses, instead, far better would be to professionalise public sector bank governance, and sell stakes to the broader public.

The duo also expressed surprise at the recommendation of the IWG in reducing the timeframe of converting a payments bank into a full-fledged commercial bank from five years to three years.