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UNTIMELY REFORMS

The Reserve Bank Of India's Internal Working Committee(IWC) constituted on June 12, 2020, to review extant ownership guidelines and corporate structure for Indian private sector banks, garnered a lot of attention like never before.


Its report states-

1. Raise the cap on promoters’ stake in private banks from the current 15 % to 26 % in 15 years.


2. Large corporate or industrial houses may be allowed as promoters of banks only after amendments to the Banking Regulation.


3. Well run large non-banking finance companies (NBFCs) with an asset size of ₹50,000 crore and above, including those owned by a corporate house, may be considered for conversion into banks - subject to completion of 10 years of operations.


4. The minimum initial capital requirement for licensing new banks should be enhanced from ₹500 crores to ₹1,000 crores for universal banks and from ₹200 crores to ₹300 crores for small finance banks.


These proposals are indicative of an extension of outside hold on the banking sector, out of the government.

I believe the proposals belong to the future India and the file should be placed back on the self.


ARE WE READY FOR LIBERALISATION OF OWNERSHIP IN BANKING SECTOR?

The straight answer to this would be a straight no.

The recent bailouts of Yes Bank, Laxmi Vilas Bank are clear examples of the failure of RBI in its governing and regulating capabilities of the public banking sector.


If the record of over-leveraging in the corporate world in recent years is to go by, entry of corporate houses into banking is the road to perdition, given the prevailing far-from-ideal corporate governance.

In the words of our former RBI Governer Raghu Ram Rajan and deputy Governer Viral Acharya, the proposals are a "bombshell"


HERE'S HOW-


INTERCONNECTED LENDING-

Corporates turned banks would work in the likes of its owners, who themselves would be corporate leaders.

There are high chances of interconnected lending tracing which would be a bridge too far for RBI. The RBI can only react to interconnected lending ex-post, that is after substantial exposure to the entities of the corporate house has happened.


The odds of RBI tracing it before such exposure are less.


GREEN LOANS-

Green loans mean extending more loans to debt-ridden companies to repay their old loans with such banks, much to the detriment of the interest of the stakeholders and general public interest, just to keep the account "green" always.


We are bound to see more such greenery if borrowers become lenders.


POWER WOULD SPEAK-

Against powerful corporate houses, the regulators would compromise in regulation and would fail in stopping funds from mobilizing around the cronies and their ventures.


PRECIPITATION OF THE BANK-

If the RBI intervenes, there is another exposure to be talked about here, the exposure of the reputation of the bank if it makes it to the defaulter's list.

This would lead to a flight of deposits from the bank as depositors lose confidence in the bank.




The IWC says when a corporate house can own an NBFC successfully, this expertise can be carried a step ahead by giving them a banking license.


Okay. Coffee. Listen

There is a stark difference between a corporate house owning san NBFC and the same owning a bank.

Banks can provide the corporate what NBFC cannot.


ACCESS TO PUBLIC SAFETY NET-

In banking,’ safety nets’ refer to government guarantees provided to depositors and sometimes to all bank creditors.

Access to it can cause these corporate banks to take excessive risks and instability, later causing pain in the head for the RBI.

THE SCOPE OF A BANK-

The reach and clout of a bank are far greater than that of an NBFC.

Industrial houses would then be provided an inexpensive capital in the form of household savings through banks.

FIRM STANCE BY THE RBI-

RBI isn't listening to experts ranging from former RBI officials to legal and finance professionals, let alone it listens to this dreamy head.


  • In February 2013, the RBI had issued guidelines that permitted corporate and industrial houses to apply for a banking license.

  • No corporate was ultimately given a bank license.

  • None of the applicants had met the ‘fit and proper’ criteria.

  • In 2014, the RBI restored the long-standing prohibition on the entry of corporate houses into banking.

The RBI’s position on the subject has remained unchanged since 2014


CONCLUSION-

The development of the banking sector plays a pivotal role in the economic condition of any country. True that,

But are these reforms the need of this hour? Definitely no.

Indeed there are more chances of these reforms backfiring into a money-laundering crisis adding another Vijay Malaya, Nirav Modi to the list.

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