Former Reserve Bank of India Governor Raghuram Rajan and Deputy Governor Viral Acharya flagged the timing of the central bank-formed internal working group’s recommendation to allow large industrial houses and corporates to promote a bank.
“Why now? Have we learnt something which allows us to override all the prior cautions on allowing industrial houses into banking?” according to a joint article by Rajan and Acharya posted on professional networking site LinkedIn.
Such a recommendation is a “bombshell”, and should not be considered, the two former Indian central bankers argued. In fact, it’s even more important now for the regulator to stick to its tried and tested limits on corporate involvement in banking, they said, adding there’s a need to tread this path cautiously, especially at a time the financial system is still learning from the collapse of Infrastructure Leasing & Financial Services and Yes Bank.
The article also asks why is there an urgency to change the regulations governing bank licensing. “After all, committees are rarely set up out of the blue. Is there some dramatic change in perception that it is responding to?” All but one expert who was consulted by the working group warned against allowing corporates entry into the banking system, they said.
The working group—constituted by the central bank to examine and review the extant licensing and regulatory guidelines relating to ownership and control, corporate structure and other related issues—said corporates’ entry into banking should be allowed only after amendments to the Banking Regulation Act and strengthening the supervisory infrastructure of the RBI.
To this, Rajan and Acharya said if sound regulation and supervision were only a matter of legislation, India would never have a bad loan problem. “It’s hard not to see that these proposed amendments as a subtle way for the IWG (internal working group) to undercut a recommendation it may have had little power over.”
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