Former Reserve Bank of India (RBI) Governor Raghuram Rajan and Lieutenant Governor Viral Acharya on Monday criticized the recommendation of the central bank’s internal working group (IWG) to allow industrial houses to float banks.
“Why now? Have we learned anything that would allow us to override all previous precautions about allowing industrial houses to go into banking? We would say no. In fact, on the contrary, it is even more important today to stick to the limits. tried and tested on corporate involvement in banking, ”said Rajan and Acharya’s joint statement, posted on Rajan’s LinkedIn identifier.
The licensing of industrial houses will concentrate the economic powers of these companies. When industrial houses needed financing, they would definitely get it from the banks that floated through them. Banks in India are rarely allowed to fail, which helps them get large deposits. If they’re owned by industrial homes, it can lead to bad loans, the duo reasoned.
“The history of these connected loans is invariably disastrous: 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. Yes Bank managed to hide its weak exposures for considerable periods, ”the authors said.
Regulators can also succumb to the political pressure of the urgency of the moment. The strict regulations around group lending rules introduced in 2016 have recently been relaxed, the former central bankers wrote. It is also difficult to distinguish whether a borrowing entity is part of a group entity.
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“Some favored ones are happily expanding, financing asset purchases with even more loans, imposing greater risks on the system,” they wrote.
Another crucial reason why industrial houses should not be entertained is that a banking license will concentrate economic and political powers with certain commercial houses. It will give an undue advantage to large business houses that already have the initial capital to contribute.
“Additionally, highly indebted and politically connected business enterprises will have the greatest incentive and ability to push for licenses. That will further increase the importance of the power of money in our politics and make us more likely to succumb to authoritarian cronyism, ”the duo noted.
The regulator can distinguish between “fit and proper” deals and shady deals, but for that, “it has to be truly independent, with a completely apolitical board. Whether these conditions will always prevail is debatable. “Furthermore, after obtaining the license, the licensee is likely to want to misuse the license with the intention of lending itself. Entities will start with a large bank, But if banks fail, the cost to the treasury would be significantly higher than for banks that float.
“Why is it urgent to change the regulation? After all, committees are rarely created from scratch. Is there a dramatic change in perception that you are responding to? “The duo pointed to the report’s appendix where it noted that all but one of the experts they consulted were against allowing industrial floating bank houses.” However, they recommend a change! “The authors expressed surprise.
Even when India needs more banks and credit penetration, former top central bankers argued that the RBI’s approach in allowing companies primarily engaged in financial services is the right one, providing management efficiency. The central bank has allowed industrial companies to create payment banks. These banks can link up with other banks for retail loans. “Why do we need new industrial houses to obtain full-fledged banking licenses? More importantly, why now, at a time when we are still trying to learn lessons from failures like ILFS and Yes Bank? “
It would also be a mistake to sell public sector banks to industrial companies; instead, it would be far better to professionalize public sector banking governance and sell shares to the general public.
“It would be ‘foolish’ to replace the bad governance under the current structure of these banks with a highly contentious ownership structure on the part of the industrial houses.”
The duo also expressed surprise at the IWG’s recommendation to reduce the time to convert a payment bank to a full-fledged commercial bank from five to three years.
It will not be enough to license industrial houses just by changing regulations. The regulations could not stop the huge accumulation of bad debt at the banks.
“It’s hard not to see these proposed amendments as a subtle way for the IWG to undermine a recommendation over which it may have little power,” Rajan and Acharya said, adding, although many of the technical points of the IWG’s recommendations are worth adopting. IWG: Licensing of industrial houses is a “best left on the shelf” idea.
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