Why Reserve Bank of India’s report has recommended that large corporate and industrial houses should be allowed ownership of private banks? Examine (200 Words)
Refer - The Indian Express
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AKSHAY KATARIYA 4 years
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IAS Parliament 4 years
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KEY POINTS
RBI on banks, bank licences for corporates, IWG RBI report explained, Reserve bank of India on corporatisation of banks, proposal to allow corporate houses to set up banks, banking sector.
Why is the recommendation to allow large corporates to float their own banks being criticised?
· A predominantly government-owned banking system tends to be more financially stable because of the trust in government as an institution.
· Moreover, even in private bank ownership, past regulators have preferred it to be well-diversified — that is, no single owner has too much stake.
· More specifically, the main concern in allowing large corporates — that is, business houses having total assets of Rs 5,000 crore or more, where the non-financial business of the group accounts for more than 40% in terms of total assets or gross income to open their own banks is a basic conflict of interest, or more technically, “connected lending”.
What is connected lending?
· Connected lending refers to a situation where the promoter of a bank is also a borrower and, as such, it is possible for a promoter to channel the depositors’ money into their own ventures.
· The recent episodes in ICICI Bank, Yes Bank, DHFL etc. were all examples of connected lending. The so-called ever-greening of loans (where one loan after another is extended to enable the borrower to pay back the previous one) is often the starting point of such lending.
Then why recommend it?
· The Indian economy, especially the private sector, needs money (credit) to grow. Far from being able to extend credit, the government-owned banks are struggling to contain their non-performing assets.
· Government finances were already strained before the Covid crisis. With growth faltering, revenues have plummeted and the government has limited ability to push for growth through the public sector banks.
· Large corporates, with deep pockets, are the ones with the financial resources to fund India’s future growth.
Saravanan 4 years
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IAS Parliament 4 years
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