Why Corporate houses should not own banks?

Context: Granting license to corporates to promote banks will be disastrous to the economy as a whole.

Background

• Recently, the RBI constituted an Internal Working Group to determine if large corporate houses can be given licence to promote banks.
• The Internal Working Group recommended to allow corporate houses to operate banks.

What are the concerns associated with this move?

• Experts caution: Former RBI Governor Raghuram Rajan and former RBI Deputy Governor Viral Acharya opined that the recommendations for allowing corporates into banking a “bombshell” and said this proposal needs to be dropped.
• Issue of connected Lending: Business houses owning an in-house bank may lead to self-lending.
• Issue of Credit Quality: Banks cannot make good loans when it is owned by the borrower. Even under the existing financial regime, the RBI was unable to detect at an early stage the connected lending which felled large regulated financial entities like IL&FS, Yes Bank (Rana Kapoor and his entities held 10.6% as on end September 2018), DHFL (promoter holding 39%).
• Growth of monopoly market: India’s business landscape is already starting to resemble a Monopoly board for example, telecommunications and transportation. Allowing corporates to own banks will strengthen this process.

What are the arguments given by RBI’s Internal Working Group in support of giving corporates licence to promote banks?

• Making necessary amendments to the Banking Regulation Act of 1949 to deal with connected lending and linkages between banks and non-financial group entities.
• Strengthening the supervisory mechanism for conglomerates. These measures will be able to regulate corporate owned banks effectively.

What is the way forward?

• The way forward should be to privatise public sector banks by allowing wide and diversified holding of stock by the general public.
• If the government exits banking ownership, it would lead to professional management and broader distribution of wealth. The banks would come under both SEBI and stringent RBI guidelines.