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Need tighter supervision before corporates run banks, say experts

A cross-section of stakeholders contacted by The Indian Express, including three of the ten experts consulted by the RBI's Internal Working Group which last week favoured entry of business houses, said companies can bring in much-needed capital, business experience and managerial competence into banking.

Written by George Mathew , Sunny Verma , Sandeep Singh | Mumbai, New Delhi | Updated: November 27, 2020 7:45:04 am
corporate banks, banks run by corporates, RBI, RBI bank corporates, Shaktikanta Das, experts on banks corporates, indian expressOpposing the entry of business houses in banking, former RBI Governor Raghuram Rajan and Deputy Governor Viral Acharya said industrial houses need financing, and they can get it easily, with no questions asked, if they have an in-house bank. (File Photo)

NEARLY 27 YEARS after the Reserve Bank of India allowed private promoters to set up banks in 1993, it is still a divided house over letting corporates run banks.

A cross-section of stakeholders contacted by The Indian Express, including three of the ten experts consulted by the RBI’s Internal Working Group which last week favoured entry of business houses, said companies can bring in much-needed capital, business experience and managerial competence into banking. But they expressed concerns over supervision of related-party lending, especially deals that hide behind complex company structures or were structured through lending to suppliers of promoters and their group companies.

One of the experts, Chandra Shekhar Ghosh, who is the MD and CEO of Bandhan Bank, said, “There is a need for more banks for growth in the financial sector. Maybe there are not that many people other than the corporates which can start a bank. In our country, for financial inclusion and to reach more people, you need more banks. In that sense, private entities, corporate or non-corporate, both can together get a licence.”

Explained | Corporates as banks: What led to this recommendation, and why has it come in for criticism?

When asked if he favoured the entry of corporates into the banking sector, Abizer Diwanji, Partner, EY India, said, “Yes… subject to fit and proper and connected exposure norms.” The amendment of the Banking Regulation Act will “strengthen controls”, he said. Diwanji was also one of the experts consulted by the RBI working group.

According to Ghosh, regulators will have to introduce fresh restrictions, different types of supervisory systems to address the questions being raised. “You cannot say these groups of people cannot come. Many of these people are very good. In terms of governance also, there are good institutions,” he said.

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The IWG has proposed amendment to the Banking Regulations Act to tighten the supervisory system before allowing corporate entry into the sector.

Former Reserve Bank Governor Raghuram Rajan and Deputy Governor Viral Acharya had criticised the working group’s proposal. Former Governors YV Reddy, D Subbarao and several RBI officers — both serving and former — too had earlier cautioned about enabling industrial houses to run banks.

But corporate leaders argue for allowing business houses into banking. “In principle, why not? The country will benefit if good businessmen running good companies create good banks. But there has to be a very clear and sharp line between banking and other businesses. While there has to be a limited shareholding, it is important there are no common or overlapping directorships. Also, there has to be zero lending to related parties of the group,” said Naushad Forbes, Co-chairman, Forbes Marshal and former President of CII.

Also read | Bank licences for corporates: RBI group ignored advice of experts

A former RBI Deputy Governor who did not wish to be named said the reasons behind barring corporate entry so far were obvious. “These days the RBI is working in close co-ordination with the Central government. It’s not clear from where this idea has come. The RBI is implementing whatever the government wants. This is just a preliminary proposal. The RBI will have to take the decision and the Banking Regulation Act needs to be amended,” he said.

Corporate houses were active in the banking sector five decades ago till the banks promoted by them were nationalised in the late 1960s amid allegations of connected lending and misuse of depositors’ money. “The past Governors of the RBI were against corporate houses’ entry during their tenures in the last 20 years,” said a former RBI official.

Prior to nationalisation, the sector was organised in the private sector. It was opened up again post liberalisation with the first round of licensing of private banks in 1993. Since then there have been two more rounds in 2003-04 and 2013-14. In 2016, the RBI put in place a on-tap licensing regime of universal banks. However, business houses were not considered though prominent corporate houses including Aditya Birla Group, Anil Ambani’s Reliance Capital and Bajaj group showed interest in 2013-14.

Editorial | Open cautiously: Banking sector needs more competition. But allowing corporates in without strong regulation could heighten systemic risk

Opposing the entry of business houses in banking, former RBI Governor Raghuram Rajan and Deputy Governor Viral Acharya said industrial houses need financing, and they can get it easily, with no questions asked, if they have an in-house bank. “The history of such connected lending is invariably disastrous – how can the bank make good loans when it is owned by the borrower? Even an independent committed regulator, with all the information in the world, finds it difficult to be in every nook and corner of the financial system to stop poor lending,” they said.

Way back in August 2011, the then RBI Governor D Subbarao said there are persuasive arguments both for and against the proposal of allowing corporate houses in banking. Addressing a meeting organised by Ficci and Indian Banks Association, he said, “By far, the biggest apprehension is about self-dealing — that companies will use the bank as a private pool of readily available funds.”

Jyoti Prakash Gadia, Managing Director, Resurgent India, said, “There is a good case for issuing banking licenses to genuine, serious, and efficient players in the corporate sector. Private banks are known to have a higher risk appetite and are more cost-effective.”

However, issues relating to conflict of interest, concentration risk, related party transactions etc are bound to arise, Gadia said. “The past experience in the pre-nationalisation era was not too happy, which made RBI take a cautious stance especially keeping in view the Basel III norms which highlight the need to have a broad-based disaggregated ownership structure,” Gadia said.

The argument in favour of the corporate entry is that public sector banks (PSB) require heavy recapitalisation before they can lend any more money in a big way. In the current compulsive situation where the government has limited resources, the gap in capital requirement can be bridged by the private corporate sector, analysts said.

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