Raghuram Rajan and Viral Acharya on Monday criticized the RBI Internal Working Group’s recommendation to allow Indian corporate companies to establish banks as part of proposed changes to the banking sector.
Raghuram Rajan, a former RBI governor, and Viral Acharya, a former RBI deputy governor, said the proposal is a “bad idea.”
“It will further increase the concentration of economic (and political) power in certain business houses,” they said of the IWG proposal in a note posted Monday on LinkedIn.
Rajan is currently the Katherine Dusak Miller Distinguished Service Professor of Finance at the Booth School of Business at the University of Chicago and Acharya is a professor at the Stern School.
They questioned the timing of the proposal at a time when “India is still trying to learn lessons from failures like IL&FS and Yes Bank.”
“Many technical rationalizations proposed by the RBI Internal Working Group are worth adopting, while their main recommendation, allowing Indian corporate companies to enter banking, is best left on the shelf,” Rajan argued.
They also questioned the urgency of changing the regulation, especially since committees are rarely created out of nowhere.
“Why is it urgent to change regulation? After all, committees are rarely created out of thin air. Is there some dramatic shift in perception that you are responding to?” ask ex RBI officers.
“If strong regulation and supervision were just a matter of legislation, India would not have an NPA problem,” they said.
Former RBI officials also said: “India has seen a number of promoters who passed the aptitude and adequacy test at the time of licensing, but then became dishonest.”
Last week, an RBI panel proposed allowing large corporations to promote banks, as well as raising the limit on promoters’ participation in private sector banks to 26%, from the current 15%.
The RBI panel recommended that companies should be allowed to control banks after necessary amendments to the Banking Regulation Act of 1949 to avoid connected lending and exposures between banks and other financial and non-financial group entities.
The RBI proposes that only well-managed NBFCs with more than 10 years of experience and ₹Rs 50 billion of assets will be allowed to be converted into a bank.
S&P Global Ratings on Monday also expressed skepticism about allowing corporate ownership in banks given India’s weak corporate governance amid large corporate defaults in recent years.
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