Don't Allow Indian Business Houses To Enter Banking: Raghuram Rajan

Former Reserve Bank of India [RBI] Governor Raghuram Rajan and former Deputy Governor Viral Acharya have said that the proposal to allow India business houses to run banks is a bad idea.

In an article jointly released on LinkedIn, Rajan and Acharya have argued against this recommendation, which was a part of a report by an internal working of the RBI on extent ownership and corporate structure in private banks in India. This recommendation in particular would be subject to regulatory fine-tuning and bolstering, by amending the Banking Regulation Act, according to the report.

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While the RBI has invited feedback over this report till January 15, 2021, this suggestion in particular has become a point of contention as it is an indication of a reversal of a longstanding stance by the central bank to refrain from exploring this path and the caution it has maintained on the issue.

Their note is quite unlike that of several brokerages, who have received the recommendation of the internal working group positively.

Rajan and Acharya say that a bank by a large corporate would be prone to misuse that even a teethed regulator would not be able to tame. Citing the Yes Bank example (which was put under moratorium in March this year), even a truly independent lender would not be able to look in every corner to prevent bad lending, which Yes Bank managed to conceal for long. Regulators are also prone to the needs of the moment and to political pressure, which can worsen this further. Moreover, it would concentrate political and economic power in the hands of a few and eventually pervert politics as highly indebted businesses with political connections would push for banking licenses.

Corporate entry recommendation despite experts saying otherwise

The note by Rajan and Acharya calls out the recommendation to permit corporate houses into banking for another reason - it was given despite all but one experts surveyed by it saying otherwise.

BOOM verified this point in the report. "All the experts except one were of the opinion that large corporate/industrial houses should not be allowed to promote a bank", the first annex to the report states. "The main reason being the prevailing corporate governance culture in corporate houses is not up to the international standard and it will be difficult to ring fence the non-financial activities of the promoters with that of the bank. be allowed to promote a bank."

They also disagree with the recommendation to permit business houses to apply for payment bank licenses, potentially enabling telecommunication and internet companies to offer deposit accounts. To this end, they could just tie up with a bank and share profits, instead of entering the business through full banking licenses, according to the authors.

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The way forward

Allowing corporate houses to enter banking would be one way for the government to broaden the potential bidders for public sector banks, says the note. Rajan and Acharya have previously opposed this move in a paper on September 21, 2020.

To heal the problems with Indian banking, they push for governance reforms and call replacing the current poor governance in banks with the conflicted structure of of ownership by industrial houses as "penny wise and pound foolish". Good governance would bring professionalism to public sector banks, and complementing it with a stake sale to financial institutions would attract capital and technological expertise.

They end by saying more technical recommendations of the report are welcome such as amending and straightening the RBI through the Banking Regulation Act, but it was by no means an end in itself.

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