MUMBAI: Ancient Reserve Bank of India Governor Raghuram Rajan and Lieutenant Governor Viral Acharya he has vigorously criticized the proposal to open banking licenses for businesses, describing the proposal as a “bomb” that is “best left on the shelf.”
The warning came even as other central bankers and S&P Global ratings warned against the move indicating it is fraught with risk.
Although all but one of the five members of the internal working group was of the opinion that large corporate / industrial companies should not be allowed to promote a bank. The opening of the banking licensing to companies is at the center of the recommendations, as the group agreed that corporate-owned financial companies should become banks. Ironically, the group had opposed corporate promoters because “the culture of corporate governance prevailing in corporate houses does not live up to international standards.”
Rajan and Acharya in a note have questioned the timing of the move, claiming that nothing has changed to justify a change in the RBI’s stance to deny banking licenses to corporate houses. They also cited the Yes Bank crisis as a limitation of the central bank to collect information on loans.
“How can the bank make good loans when it is owned by the borrower? Even a committed independent regulator, with all the information in the world, finds it difficult to be in every corner of the financial system to stop poor lending. Information on loan performance is rarely timely or accurate, ”they said in a note.
According to former central bankers, if strong regulation and supervision could be addressed through legislation, India would not have the bad loan problem it faces today.
They also said allowing companies to go into banking to increase bidders from public sector banks was a bad idea. “It would be a mistake, as we said in a previous article, to sell a public sector bank to an unproven industrial house. It is much better to professionalize the banking governance of the public sector and sell shares to the general public, ”the note said.
Rajan and Acharya have also opposed the proposed third route to allow businesses to enter banking: through the small financial banks route. “A second possibility is that an industrial house that has a payment bank license wants to transform itself into a bank. An IWG recommendation that is equally difficult to understand is to shorten the time for such a transformation from five to three years, so perhaps the surprising recommendations should be read together, ”the note says.
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