Well done, RBI, stay firm on bank licences1 min read . Updated: 06 Aug 2020, 11:20 AM IST
- Once again, the central bank has had to reject a proposal to let corporate houses run banks in India. For safety, banks need to be free of extra-banking interests. And what goes for the public sector goes for the private sector too
It’s odd how a futile debate keeps re-emerging in India over awarding corporate houses licences to run banks. Once again, as reported, the Reserve Bank of India (RBI) has had to turn down a government proposal to allow India Inc into the business of commercial lending. Globally, this is recognized as a bad idea. The big hairy problem with this is that a bank owned by a business group would find it hard to keep the two operations apart. To overcome this, the new proposal asks for such banks to be barred from lending to their own group entities. Yet, groups deal with various other firms, and the rule could easily be circumvented in an incestuous field of business.
In RBI’s view, the regulatory structure needed to police corporate-owned banks would be too complex, and failures of regulation could generate financial instability. This is a risk not to be taken lightly in a country that has seen its banking sector weaken to the point of fragility. The sector remains dominated by State-owned banks. Private banks are far stronger, no doubt. They have performed a lot better on every parameter, thanks to better lending decisions, as evident in comparisons of the bad-loan burdens they bear. But this does not mean private companies should open banks.
It’s true that the need for banks to be free of extra-banking interests has meant we have too few private banks. But, what goes for the public sector goes for the private sector too. Independence of operations is important for the sake of professionalism. And depositors need to trust the safety of their money.