RBI panel under fire for favouring bank licenses for large corporates

It is interesting to note that the working group is in favour of this proposal despite only one expert out of all the experts whom the working group consulted for suggestions, backed this proposal.

Hyderabad: The report submitted by an Internal Working Group (IWG) of the RBI on bank ownership guidelines has invited sharp criticism from ex-central bankers, experts and research agencies.

The group of officials led by PK Mohanty on 20 November recommended the Reserve Bank of India (RBI) to allow large corporate/industrial houses to set up banks after necessary amendments to the Banking Regulations Act, 1949.

Ex-RBI Governor Raghuram Rajan and Ex-Deputy Governor of RBI Viral Acharya, in a joint article posted on LinkedIn, have said: “Industrial houses need financing, and they can get it easily, with no questions asked, if they have an in-house bank…How can the bank make good loans when it is owned by the borrower?”

If accepted, this would be a major policy shift as the Central Bank has long been known for its resistance to banks promoted by industrial houses.

It may be recalled, private bank license guidelines released by the RBI in 2016 noted that the large industrial and business houses were excluded as eligible entities while permitting up to 10% of total investment.

It is also interesting to note that the working group is in favour of this proposal despite only one expert out of all the experts whom the working group consulted for suggestions, advised in favour of big corporate houses.

Echoing similar views, Macquarie Research in its latest report said: “The experience of allowing corporate houses to run banks has been pretty bad for RBI (eg: Times Bank, Bank of Rajasthan, etc) and thus, we do not believe RBI will grant licences to corporate houses.”

What surprised most of the experts is the fact that the report was released within days of the collapse of Lakshmi Vilas Bank, a Chennai-based 92-year-old private lender.

“Why is there urgency to change the regulation? After all, committees are rarely set up out of the blue. Is there some dramatic change in perception that it is responding to?” said Rajan and Acharya.