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Biz houses and banks — misplaced worries

The RBI’s norms specifically require promoters to ring-fence their banks’ operations.

Written by Anil Sasi | Published: October 4, 2013 3:29:36 am

Given the sharply divergent views on the issue of permitting industrial and business houses to promote banks,the concerns raised by most of those opposed to the entry of industrial houses in the banking space appear to be misplaced on several counts. This includes the issues raised by Parliamentary Standing Committee on Finance,which late last week had put on record its opposition to the move on the grounds that granting banking licences to corporates will take the country back to “the pre-nationalisation era”.

For one,banks promoted by industrial houses will be subject to more prudent regulation than in the pre-nationalisation era,with the RBI clearly alive to the challenge of striking a balance between ensuring that the new ventures are promoted by serious,well-capitalised players with deep pockets,and simultaneously neutralising any potential conflict of interest this could engender.

The international experience offers some insights. While countries such as Australia,Brazil,Canada,Germany,France,Japan and the UK do not specifically restrict industrial houses from setting up banks,there are restrictions in place in countries such as the US and South Korea. Among first lot of countries,the list of successful banks promoted by industrial houses include Tesco Bank and Virgin Money in the UK,the Volkswagen Bank,Mercedes-Benz Bank,BMW Bank and Siemens Bank (all Germany),Banco Ahorro Famsa and Banco Azteca (both Mexico),Techcom Bank (Vietnam),Transcredit Bank,MDM Bank,Alfa Bank (all three in Russia) and Alior Bank (Poland). Most of these are operating successfully,with the diligent application of the arms-length principle and ring-fencing of the banking business clearly seen to be working.

While the Parliamentary panel has pointed to how managements of private banks in the past had used them as captive fund pools for their own businesses — a trigger for nationalisation in the eighties — there is little chance of that playing out now. The RBI’s norms specifically require promoters to ring-fence their banks’ operations from the activities of other group concerns and they need to be widely held. Plus,with the recent amendments to the Banking Regulation Act,1949,the RBI has been empowered to call for information relating to the affairs of any associate enterprise of the banking company and also cause an inspection of its books of account. It also empowers the RBI to supersede the Boards of the banks. All of this should sufficiently address the concerns that have been flagged.

Anil is a senior editor based in New Delhi.

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