Former RBI governor Raghuram Rajan criticises proposal allowing large corporates to own banks

The former Reserve Bank of India (RBI) governor Raghuram Rajan and former deputy governor Viral Acharya have questioned the RBI internal working group recommendation on allowing large industrial houses to own bank.

The two have, in an article written together, have questioned the timing of the recommendations even as they argue strongly against any such move.

“Have we learnt something that allows us to override all the prior cautions on allowing industrial houses into banking,” ask the former central bankers.

They have argued in the article that industrial houses need financing, and they can get it easily, with no questions asked, if they have an in-house bank.

“The history of such connected lending is invariably disastrous – how can the bank make good loans when it is owned by the borrower. Even an independent committed regulator, with all the information in the world, finds it difficult to be in every nook and corner of the financial system to stop poor lending. Information on loan performance is rarely timely or accurate,” they say as they cite the example of Yes Bank and how it managed to conceal its weak exposures for considerable periods.

The two also further argue that regulators can succumb to either political pressure or the urgency of the moment. “The RBI recognized the risk of excessive exposures to specific houses in 2016 by announcing group exposure norms, which limit how much exposure the banking system can have to specific industrial houses. These norms have been relaxed recently,” they say.

Their second argument against the proposal to allow large industrial house own banks is that it will further exacerbate the concentration of economic (and political) power in certain business houses. “Even if banking licenses are allotted fairly, it will give undue advantage to large business houses that already have the initial capital that has to be put up. Moreover, highly indebted and politically connected business houses will have the greatest incentive and ability to push for licenses. That will increase the importance of money power yet more in our politics, and make us more likely to succumb to authoritarian cronyism,” they say.

While they admit that the regulator can discriminate between “fit and proper” businesses and shady ones, but it has to be truly independent, with a thoroughly apolitical board, to actually thwart any cronyism in doling out banking licenses to large industrial houses.

Moreover, they say that there have been enough cases in the past where promoters who have passed fit and proper tests at the time of licensing going rogue afterwards. “Once the bank license is given, the licensee’s temptation will be to misuse it because of self-lending opportunities. The bailout costs to the exchequer could be significantly more when it comes to bank licenses to industrial houses, which will start out big,” say Raghuram Rajan and Viral Acharya.