Former RBI Governor Raghuram Rajan has criticised the proposal. So has S&P. But Edelweiss’ Rashesh Shah is in agreement with the recommendation of the Reserve Bank of India’s Internal Working Group that corporate houses be allowed an entry into banking.
To grow from a $3 trillion to $5 trillion economy, India needs bigger banks and more banks. Banks need capital and large business groups can provide that, is Shah’s argument. “India needs a lot of banks, we need a lot more banking penetration and banking needs capital because for every hundred rupees of loan that a bank gives, it is needs about 10 to 15 rupees of equity capital. This is really long-term equity capital, India has always faced a shortage of that—of where does such long term equity capital come from? So, I think corporate houses will bring that.”
The RBI Internal Working Group proposal is predicated on necessary changes to regulatory and supervisory functions in order to prevent connected lending and exposures between the banks and other financial and non-financial group entities. Yet, the proposal poses high risk, said S&P Ratings in a note. “…RBI will face challenges in supervising nonfinancial sector entities and supervisory resources could be further strained at a time when the health of India’s financial sector is weak,” the S&P note said.
A blog authored by Rajan and Viral Acharya, former deputy governor of the central bank, is blunt in its disfavour. “Why now? Have we learnt something which allows us to override all the prior cautions on allowing industrial houses into banking,” it asks.
An economy that wants to grow rapidly will require all its financial regulators to boost supervisory capacity, Shah said in an interview to BloombergQuint before the Rajan-Acharya post was published.
On the issue of connected lending and or contagion risks, he notes that large business houses are already dealing with household savings via their NBFC, mutual fund and insurance ventures. “Banking is just one more step in that direction,” said the chairman of Edelweiss Group, with interests in corporate and retail credit, asset management and insurance.