It has been suggested that large corporate and industrial houses should be allowed to act as promoters of banks. Critically analyze.

Historically, RBI has not been very liberal in providing banking licenses to private players. The last ones to get the licenses were IDBI and Bandhan Bank, which too for specific purposes.

Advantages of allowing large corporate houses as promotors of banks:

  • Private partnerships/investment/entry into the government-dominated banking sector will necessarily bring in competition in the banking sector.
  • It can increase financial inclusion by the use of more innovative tools and increased banking.
  • Will help the economy, which is otherwise suffering from the burden of rising NPAs.
  • Can bring more capital and expertise.

Various forms of participation:

  • Individuals as promoters.
  • Large corporate houses.
  • NBFCs converting to banks.
  • Payment banks converting to small finance banks.
  • As a non-operative financial holding company.

Concerns:

  • May raise issues of connected landing where promoters lend to unworthy but connected parties.
  • May leas to circular lending where promoters would pool in to transfer funds to each other.
  • NBFCs suffer from asset-liability mismatches and must be licensed as banks only if they match bank-like standards i.e, CRR, SLR.
  • Hike in promotor’s stakes, in the long run, may increase the ever-rising economic inequality.
  • Such banks may not always adhere to norms like priority sector lending and banking the unbanked.

Way Forward:

RBI has recently set up an internal working group to look into the essential conditions to be adhered to, by corporate houses and other private players before formally entering the banking system. It suggested:

  • Harmonization and uniformity in different licensing guidelines.
  • Payment banks and small finance banks must have credible track records.
  • Only healthy and well-run NBFCs may be given licenses.
  • Strong corporate governance tools must be put in place before letting private players as promoters in banks.

Recent failures in internal/external control have necessitated far more strict regulation and efficient use of ICT tools.

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