IASbhai Daily Editorial Hunt | 25th Nov 2020
“It is never too late to be what you might have been.” – George Eliot
EDITORIAL HUNT #259 :“What if Corporate own the Banks ? 15 Consequences | UPSC”
T.T. Ram Mohan
What if Corporate own the Banks ? 15 Consequences | UPSC
T.T. Ram Mohan is a professor at IIM Ahmedabad.
Say ‘no’ to corporate houses in Indian banking
The banking sector needs reform but the recommendation of corporate-owned banks is neither ‘big bang’ nor risk-free
SYLLABUS COVERED: GS 3 : RBI : Banking
There was a much needed banking sector reform needed at large but the recommendation of corporate-owned banks is neither ‘big bang’ nor risk-free. Examine -(GS 3)
- Dominance of Corporates
- The Worry is the risks
- Regulatory Credibility at risk
- Points to Privatisation
- RB’S INTERNAL WORKING GROUP : The IWG was constituted to “review extant ownership guidelines and corporate structure for Indian private sector banks” and submitted its report last week.
- IWG RECOMMENDATIONS : An Internal Working Group of the Reserve Bank of India (RBI) has recommended that corporate houses be given bank licences.
- BANKING SECTOR : The banking system in any country is of critical importance for sustaining economic growth.
- OVER THE YEARS : India’s banking system has changed a lot since Independence when banks were owned by the private sector, resulting in a “large concentration of resources in the hands of a few business families”.
FIRST, THE IDEA
- NATIONALISATION OF BANKS : The idea was a wider spread of bank credit, prevent its misuse, direct a larger volume of credit flow to priority sectors and to make it an effective instrument of economic development.
- A RAPID GROWTH : The total balance sheet of banks in India still constitutes less than 70 per cent of the GDP, which is much less compared to global peers” such as China.
SOURCES : IE
- CENTRAL BANK’S STAND : RBI has been of the view that the ideal ownership status of banks should promote a balance between efficiency, equity and financial stability.
- PRIVATE ENTITIES : Only two entities qualified for a licence, IDFC and Bandhan Financial Services.
- REASON OF PROHIBITION : This prohibition on the ‘banking and commerce’ combine still exists in the United States today, and is certainly necessary in India till private governance and regulatory capacity improve.
15 REASONS-THE WORRY IS THE RISKS
- FAVORITISM : Corporate houses can easily turn banks into a source of funds for their own businesses.
- REBIRTH OF CRONY CAPITALISM : In addition, they can ensure that funds are directed to their cronies.
- RESOURCE UTILISATION : They can use banks to provide finance to customers and suppliers of their businesses.
- CONCENTRATION OF POWER : Adding a bank to a corporate house thus means an increase in concentration of economic power.
- BIGOTRY : Just as politicians have used banks to further their political interests, so will corporate houses be tempted to use banks set up by them to enhance their clout.
- DEBT CRISIS : Banks owned by corporate houses will be exposed to the risks of the non-bank entities of the group.
- PREFERENTIAL TREATMENT : If the non-bank entities get into trouble, sentiment about the bank owned by the corporate house is bound to be impacted.
- DEPOSITORS AT RISK : Depositors may have to be rescued through the use of the public safety net.
- INTERCONNECTED LENDING : It is naive to suppose that any legal framework and supervisory mechanism will be adequate to deal with the risks of interconnected lending in the Indian context.
- ROUTING FUNDS ABROAD : Corporate houses are adept at routing funds through a maze of entities in India and abroad.
- TRACING AND SUPERVISION : Tracing interconnected lending will be a challenge.
- FRAMEWORK : Monitoring any transactions of corporate houses will require the cooperation of various law enforcement agencies.
- AUTHORITARIANISM : Corporate houses can use their political clout to thwart such cooperation.
- CREDIBILITY CRUNCH : RBI can only react to interconnected lending ex-post, that is, after substantial exposure to the entities of the corporate house has happened.
- CONTINGENCY PLAN : Any action that the RBI may take in response could cause a flight of deposits from the bank concerned and precipitate its failure.
REGULATOR CREDIBILITY AT STAKE
- LEGAL FRAMEWORK : The IWG believes that before corporate houses are allowed to enter banking, the RBI must be equipped with a legal framework to deal with interconnected lending and a mechanism .
- POWERFUL CORPORATE HOUSES : Pitting the regulator against powerful corporate houses could end up damaging the regulator.
- CREDIBILITY DENT : Its credibility would be dented in the process.This would indeed be a tragedy given the stature the RBI enjoys today.
- PRESENT NBFC’S : There are corporate houses that are already present in banking-related activities through ownership of Non-Banking Financial Companies (NBFCs).
- MINIMUM CRITERIA : Under the present policy, NBFCs with a successful track record of 10 years are allowed to convert themselves into banks.
- GRANTS : The Internal Working Group believes that NBFCs owned by corporate houses should be eligible for such conversion.
IT POINTS TO PRIVATISATION
SOURCES : TIMES OF INDIA
- VALUATION OF ASSETS : The real attraction will be the possibility of acquiring public sector banks, whose valuations have been battered in recent years.
- PRIVATISATION : Public sector banks need capital that the state is unable to provide.The entry of corporate houses, if it happens at all, is thus likely to be a prelude to privatisation.
- FINANCIAL STABILITY : Indian corporate world, any sale of public sector banks to corporate houses would raise serious concerns about financial stability.
It would be ‘penny wise pound foolish’ to replace the poor governance under the present structure of these banks with a highly conflicted structure of ownership by industrial houses- RAGHURAM RANJAN
SOURCES: THE HINDU EDITORIAL HUNT | What if Corporate own the Banks ? 15 Consequences | UPSC