Context: Internal Committee of Reserve Bank of India recommended licenses to qualified corporate houses after amending Banking Regulation Act, 1949. This has resulted in a range of reactions in different quarters.

Background: In the year, 2013, the RBI had issued guidelines that permitted corporate houses to apply for a banking license. The decision was rolled back in 2014 by then RBI Governor Raghuram. He believed that it was premature to allow industrial houses to own banks. 

Argument in favor of license to corporate:

• It will bring in capital to the banks, much needed during the present global financial slowdown.
• It will improve corporate expertise and management efficiency.
• RBI as regulator is experienced to deal with corporate houses. It has experience with corporate houses already present in activities through NBFCs ownerships gives it sufficient exposure.

Mohanty Panel by RBI to review the ownership of private sector banks supports the idea of corporate licensing.

Arguments against the license to corporate

• RBI’s objection of the past can’t be ignored. Also, the Committee on Financial Sector Reforms headed by former RBI governor Raghuram Rajan was against the entry of corporate houses in banking, till private governance and regulatory capacity improves in India.
• There is apprehension regarding the conversion of such amendment to ground. Even when in 2013, RBI allowed the banks to bid, very few houses participated and none was ultimately given the license.
• RBI is not equipped with a legal framework to deal with interconnected lending and a mechanism to effectively supervise conglomerates that will enter into banking.
• Entry of corporations will deteriorate public trust in banks as there will always be an apprehension of inter-connected lending by corporate houses to their cronies.
• Corporate entry will increase concentration of economic power where Corporate  can use their control to promote their interest.
• It will expose banks to corporate and political interference.
• Instability to corporate owned banks, as depositors are bound to be influenced by the corporate’s market condition.
• Regulation of banks is different from that of NBFC.
• It is a step toward privatization of the Financial sectors.

WAY FORWARD–

• Holistic debate before bringing such initiative into act is must to retain public trust
• Improvement in private governance and regulatory capacity is prerequisite
• Mechanism for effective supervision with cooperation of various law agencies is much needed to deal with interconnected lending.

Reference:

1. https://www.thehindu.com/opinion/lead/say-no-to-corporate-houses-in-indian-banking/article33172192.ece