RBI’s Proposition to Allow Corporates into Banking Sector is Risky

An internal working group of RBI has recently proposed to pave the way for corporate houses to set up
banks in India. This proposition is filled with risks as RBI has been weak in its supervisory capacity in the
past. Thus, its ability to monitor and supervise the lending by these corporate banks is questionable. As
per Global Ratings, this is a challenging and risky proposition as there will be a concentration of
power and a conflict of interests if corporate houses are allowed to set up banks in India.
There will also be a high risk of Intergraph lending, also known as connected lending. This implies there
will always be a possibility of private companies getting their banks to lend to the company itself or to
other connected companies. This would mean the promoters of the bank would be channelling the
money of the depositor’s for their own business ventures. To avoid such risks, it is necessary that the
class of the lenders and borrowers is not the same.
It would be advisable for RBI to set up an additional supervisory authority before going through with this
proposition. An example could be a resolution authority such as the US Federal Deposit Insurance
Corporation. This will naturally require an amendment in the Financial Resolution and Deposit Insurance
Bill.
After the Resolution authority and RBI are able to show a good record in their supervisory capacity of
banks, then going through with the proposal of allowing corporate houses to step into the Indian
the banking sector would be less risky and advisable. The poor performance showed by government-owned
banks can be stabilized if corporate houses enter the Indian banking sector If the Indian banking system
is able to reach the needed supervisory capacity, corporate houses can be welcomed in the banking
venture.

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