Yet to take decision on industrial houses in banking, says Shaktikanta Das

The decision to allow industrial houses to control banks has evoked much debate and controversy at a time when there have been multiple bank failures leading to bailouts.

RBI says banks reluctant to lend to big business

RBI Governor Shaktikanta Das.

3 min readMumbaiDec 5, 2020 01:17 AM IST First published on: Dec 5, 2020 at 01:17 AM IST

RBI Governor Shaktikanta Das on Friday said the central bank has not taken a decision on the issue of allowing industrial houses to enter the banking sector. Two weeks ago, an internal working group (IWG) constituted by the RBI to study ownership structures of private lenders had suggested a guarded entry of corporates into the banking space, conversion of big NBFCs into banks and promoters to hike their stakes from 15 per cent to 26 per cent.

In a press conference following the monetary policy review Das said, “It is a report by the internal working group. It should not be seen as the RBI’s point of view or decision.” The IWG had external members, acted independently, and had independent deliberations, Das said.

“The RBI has not taken any decision so far,” Das reiterated. “Our approach is consultative.” “The report of the internal working group is in the public domain. After receiving comments from interested parties, the central bank will “examine the whole matter and take a considered decision.”

Explained Ideas: Why permitting large industrial houses to own banks is a bad idea

The decision to allow industrial houses to control banks has evoked much debate and controversy at a time when there have been multiple bank failures leading to bailouts (Yes Bank and Lakshmi Vilas Bank), the scars from the IL&FS and DHFL frauds have not yet healed and questions are being asked about the RBI’s supervisory capacity. Several experts consulted by the IWG were also against allowing business houses into the banking sector.

Former RBI Governor Raghuram Rajan and former deputy governor Viral Acharya were the earliest to weigh in, questioning the need for such a proposal at this time.

In an essay posted on Rajan’s LinkedIn profile, the duo said that the proposal to let industrial houses into banking will lead to “connected lending” which, according to them, is “invariably disastrous” and would further “exacerbate the concentration of economic (and political) power in certain business houses.” The former RBI officials termed the proposal “bombshell” and advised that it was “best left on the shelf.”

Similarly, in an op-ed in The Indian Express, former chief economic advisors Arvind Subramanian and Shankar Acharya, and former finance secretary Vijay Kelkar said the step would be a “grievous mistake” which could “seriously set back economic and political development.”

‘Banks must invest in robust IT systems’

Reserve Bank Governor Shaktikanta Das said banks and NBFCs need to invest in robust IT systems to maintain public confidence. His statement came a day after the central bank pulled up HDFC Bank for repeated outages in its digital services. “Overall, banks, NBFCs and other lenders need to boost IT systems to maintain public confidence. We see need for more investment in robust IT solutions by all financial entities,” he said. ENS