Recently, the Reserve Bank of India (RBI) has reviewed recommendations from its Internal Working Committee (IWG). The IWG suggested that large corporate and industrial houses could be permitted to promote banks after certain amendments to the Banking Regulations Act of 1949. The RBI accepted 21 out of the 33 recommendations about private bank ownership. However, it did not comment on offering banking licenses to major business groups.
Historical Overview of Corporate Houses in Banking Sector
Corporate Houses (CH) were significantly involved in the banking sector until about fifty years ago. Banks promoted by them were nationalised in the late 1960s following allegations of connected lending and misuse of depositor’s money. The banking sector reopened to CHs following liberalisation in 1991, and private banks were first licensed in 1993. Subsequent rounds of licensing took place in 2003-04 and 2013-14, concluding with the on-tap licensing regime of universal banks in 2016. Notably, even high-profile business houses were excluded from consideration in 2013-14.
The Benefits of Permitting Corporations to Own Banks
When corporations are allowed into the banking sector, they can help plug capital gaps. At present, the government funds public sector banks using taxpayer money. Furthermore, a significant portion of the population still does not have access to banking services. The entry of corporations can open up more branches and bring more people under the banking umbrella. These changes would bolster competition, putting pressure on Public sector banks to remain competitive.
Concerns with Allowing Corporations to Own Banks
However, there are serious concerns associated with allowing corporations to own banks. There is a risk of connected lending and moral hazard as banks could hide related party lending behind complex company structures. Big businesses already account for a large portion of Non-Performing Assets (NPAs) in the banking system, even without becoming bank promoters. Another issue is circular lending, which is difficult to track in real time due to existing legal structures and the proliferation of shell companies.
Issues of Inequality and Concentration of Wealth
Allowing corporations to own banks could accelerate the concentration of wealth and increase inequalities, strengthening big industry groups that already dominate key sectors such as telecom, organised retail, aviation, software, and e-commerce. In light of the banking sector’s recent struggles, the RBI established new guidelines in 2016 limiting single company lending. It posited that lending too much to one company presents a risk if that company fails. Hence, admitting industry groups into the banking sector contradicts this earlier ruling.
The Way Forward
Before entrusting corporations with significant economic power, it is crucial to implement long-pending banking reforms and reinforce the functional autonomy of the RBI. Recent incidents such as the alarming fraud at PNB and failures of banks/NBFCs like Lakshmi Vilas Bank and Yes Bank underscore the importance of new regulations, stringent supervisory mechanisms, and corporate governance. There is a need for a robust IT and AI enabled platform. For a corporate house to promote a bank, there should be strict regulations on the use of funds held with the bank and monitoring of related party transactions is vital. The fit and proper criterion must be foolproof, ensuring that common citizens reap the benefits.
