Don’t bank on corporates
It’s best to heed the advice of Rajan and Acharya and to stick to the tried and tested on corporate involvement
The Reserve Bank of India’s proposal to allow corporate groups into the banking sector is not only flawed conceptually but also poorly timed. It is curious that the idea is being floated at a time when India is still learning the lessons from the failures associated with the Infrastructure Leasing & Financial Services Limited (IL&FS) and Yes Bank. These crises have already exposed the poor regulation of banks, inconsistent corporate governance standards and lack of resolution mechanisms. Against this backdrop, any move to allow big corporate entities into banking could further exacerbate the concentration of economic and political power in the hands of certain chosen business houses, a prospect that would be detrimental to the interests of the country. The Centre would do well to reject the proposal as such a policy is fraught with risks and could hurt the depositors and eventually force more government bailouts in future. The government must heed the advice of noted economists Raghuram Rajan and Viral Acharya, both of whom were associated with the central bank. They have rightly flagged the concerns over the proposal put forward by the RBI’s working group and advised the government to stick to the tried and tested limits on corporate involvement in banking. The industrial houses invariably need financing, which they can get easily without any questions being asked if they have an in-house bank. The history of such connected lending has been disastrous in the country. The key question is how any bank can recover loans fully when it is owned by the borrower.
It doesn’t need rocket science to assume that the politically connected business houses will have the greatest incentive and ability to push for new banking licences, a move that could make India more likely to succumb to “authoritarian cronyism”. It must be pointed out that corporate governance in Indian companies is not up to international standards and it will be difficult to ring-fence the non-financial activities of the promoters in the event of allowing industrial houses into banking. In March 2018, the domestic bad loans of Indian banks peaked at Rs 9.62 lakh crore. Of this, the defaults made by the industry stood at around 73.2% or Rs 7.04 lakh crore. The corporates have thus been responsible for a bulk of the mess in the country’s banking sector. In such a precarious circumstance, it would be a disastrous move to allow industrial houses to own banks. While there is a strong case for liberalising the entry into the banking sector and creation of big private banks to cater to the financial needs of the economy, a robust mechanism of checks and balances needs to be put in place first to prevent any misuse of the policy.
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