IAS Gyan

Daily News Analysis

Why business barons should not run banks

2nd December, 2020 Economy

Context: They will not only enrich themselves but also crush competition

  • RBI constituted an Internal Working Group to determine if large corporate houses can be given license to promote banks and recommended that they be allowed to operate banks, all without inviting a larger public debate, is unconscionable.
  • Banking regulations for licensing have not been diluted in the last 50 years to allow business barons to promote a bank.
  • Whenever these requests came up, it was always frowned upon.
  • RBI has recommended it even after its own Internal Working Group “found out from its set of experts that barring one, all of them were of the opinion that large corporate/industrial houses should not be allowed to promote a bank” is baffling.

Not a welcome move

  • The history of such connected lending is invariably disastrous.
  • Even an independent committed regulator, with all the information in the world, finds it difficult to be in every nook and corner of the financial system to stop poor lending.
  • Information on loan performance is rarely timely or accurate.
  • Less risky options is of asking corporates who promote banks to pare down their shareholding to 15% over the long term and penalties for misdemeanors and connected lending violations, by bringing down their voting rights to 5%.
  • The RBI is overlooking time-tested principles and limits of disallowing mega business houses from promoting and owning banks.
  • It is saying this can be done by making necessary amendments to the Banking Regulation Act of 1949 to deal with connected lending and linkages between banks and non-financial group entities, and strengthening the supervisory mechanism for conglomerates.
  • This is in stark departure from its long-held opinion on the subject since 1969 when banks were nationalized.
  • History is replete with evidence of business barons who were good when they started out only to eventually morph into robber barons who not only enriched themselves owing to their enormous wealth and nexus with politicians in power, but also crushed competition.
  • Public sector banks may be inefficient and indifferent and under the influence of the party in power but private sector banks that are owned by oligarchs and business tycoons in cahoots with politicians will be rapacious monsters.

The way forward

  • The way forward should be to privatize public sector banks by allowing wide and diversified holding of stock by the general public.
  • If the government exits banking ownership, that would lead to professional management and broader distribution of wealth.
  • The banks should come under both SEBI and stringent RBI guidelines.