The Reserve Bank of India (RBI) recently released a report of an Internal Working Group (IWG) to review banking ownership guidelines. It is quite normal for the Reserve Bank to review its regulations periodically, but it’s most important recommendation, the proposal to allow Indian corporate houses into banking would be a big move. The Indian banking system is well known for its strict regulations and banks in India are rarely allowed to fail. The trust of depositors is kept by the central bank till this day. But the introduction of corporate houses might change the scenario.
The IWG points out the low credit to GDP ratio of the country and proposes allowing industrial houses to banking. It is true that this move would expand credit but the negative impacts that this might inflict is comparatively huge.
The threat of self-lending- which means if the industrial house needs financing, and they can get it easily, with no questions asked, if they have an inhouse bank. Another threat is that it exacerbates the concentration of economic power in certain business powers. This would further increase the polarization in the Indian economy which is already gravely polarized.
Even when the Credit to GDP ratio is low and calls for help, The Non-Performing Asset (NPA) to GDP is quite higher. Which means despite the low level of lending, our banks incur huge loan losses which ultimately falls on the taxpayer.
Another claim by IWG is that it would increase RBI’s powers before allowing the corporate houses to banking, but the still existing high NPA shows the fact that the original problem is not with sound regulations or supervision. As former RBI Governor Dr. Raghuram Rajan observes, ‘In sum , many of the technical rationalizations proposed by the IWG are worth adopting, while its main recommendation- to allow Indian corporate houses into banking – is better left on the self.
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