In its latest update on financial stability in India, the International Monetary Fund (IMF) has warned against granting bank licences to industrial houses in India. The Fund’s warning follows that of Nobel-winning economist Joseph Stiglitz, who spoke against corporate ownership of banks in his recent visit to India.
Amidst a growing clamour by business groups to liberalize bank ownership norms, such warnings should prompt a rethink on whether the risks to financial stability from allowing corporate ownership of banks outweigh the benefits.
IMF thinks the risks outweigh the benefits currently and says so quite bluntly:
“…the legal, operational, and regulatory framework for consolidated supervision of both bank led groups and financial conglomerates is still missing some important elements, and it would be prudent to first put in place and gain sufficient experience from implementing a comprehensive framework for this purpose before even considering whether to proceed with the entry of mixed groups and conglomerates.”
Concerns about perverse inter-group lending and risks of contagion cannot be dismissed lightly. While more banks will promote competitiveness and might even lead to greater financial inclusion, it is worthwhile to ponder if there are less risky ways to achieve these noble aims. Recent financial history shows that the road to hell is often paved with good intentions. Even sub-prime mortgages were justified in the US on the grounds of greater inclusion—policy makers in the US wanted more poor people to own homes. The risks were never acknowledged till the sub-prime crisis erupted.
The Indian experience with corporate ownership of banks has been a messy affair in the past. The international experience too has not been very bright, as the IMF points out. The IMF would know. Some of the biggest disasters arising from corporate ownership of banks occurred in Latin American economies, which were following policies laid down by a more aggressive Fund during its heydays in the seventies and eighties. Most developed markets have had stringent restrictions on bank ownership norms since long. Economies such as Japan, where banks had an incestuous affair with corporate groups, paid a heavy price for it.
India’s policy on bank licences acknowledges some of the risks of corporate ownership and tries to address them but as the IMF report points out, this may not be adequate.