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MUMBAI : The Reserve Bank of India believes that keeping industrial houses away from banking is essential, given the highly leveraged nature of the banking business.
Speaking at the Mint Annual Banking Conclave, RBI deputy governor M. Rajeshwar Rao said that while the central bank is examining this matter, this separation is needed to avoid spillover risks to depositors.
“Given that banking is a highly leveraged business, dealing with public money, it makes sense to keep business and banking separate. This separation is expected to avoid spillover risks—where trouble anywhere in the group entity may result in transferring risks onto the depositors, leading, in turn, to claims on deposit insurance, with subsequent ripple effects cascading across the largely interconnected financial systems, creating concerns around financial stability. These issues have been flagged by the internal working group also. Therefore, it is necessary that we closely examine related matters before thinking of permitting large industrial houses or NBFCs owned by such houses to set up any new bank. To conclude, let me just say that the jury is still out on the issue," he said.
Rao emphasized the need for banks to strengthen their governance standards by increasing scrutiny of the role of promoters, major shareholders and senior management. While there is a need to separate ownership from control, banks also need to ensure that the management’s incentives align with depositors’ interest and other stakeholders.
“Banks tend to be well-regulated and are intensively supervised, but any erosion of public trust in financial institutions cannot be countered with regulatory prescriptions or supervisory rigours alone. Therefore, to mitigate the ‘risk of failure’ emanating from governance issues, the standards expected of banks are always higher than those from other entities," he said.
Rao also highlighted that the key to good governance rests with the board. The board should set the “tone at the top" and oversee management’s role in fostering and maintaining sound governance, compliance, and risk culture, he said. Independent directors help bring clarity regarding responsibilities and enhance the management’s accountability to the stakeholders, he added.
