Playing to the Corporates

Photo : businesstoday.in

By Mrgya V

On 20th november, a reserve bank of india (RBI) panel allowed large corporate groups into the banking sector. This step was taken by the central bank on the recommendation of Internal Working Group , which suggested this move on the basis of the need for greater competition and for greater private capital by the economy.

This topic of giving permission to big corporate houses to form banks came into light during earlier banking reform periods also but was dealt with cautiously. In the 2001 and 2013 licensing guidelines, a few new private sector banks were allowed to enter the sector under certain terms and conditions. 

The RBI’s internal working group’s proposal came tempered with many caveats. New reforms came  in a very hassled manner and without proper checks and balances. All this puts it under a suspicious light. Normally the committees of RBI take almost 2 years to submit a report.  This  IWG has been given two month time to submit it. Proper discussions and debates were surpassed from the process. Most experts have cautioned against this move. 

After the notice of this move, former RBI governor Raghuram Rajan and his erstwhile deputy, Viral Acharya have strongly criticised it and called this move a “Bombshell” that could further exacerbate the concentration of economic and political power in “certain business houses”.

There are a few concrete points on which the criticism is coming. First, industrial houses need financing, and they can get it easily,with no question asked, if they have an in-house bank. The history of connected lending is invariably disastrous. It can also give birth to circular lending where these banks owned by private companies will offer loans to each other. 

Rajan and Acharya also argued that “highly indebted and politically connected business houses“ will have the greatest incentive and ability to push for new banking licenses, a move that could make India more likely to succumb to “authoritarian cronyism”.

We have already seen examples of crony capitalism in the recent past. This move is going to accelerate the growth of crony capitalism as more politically connected businesses will obtain these licences. Large corporates are concentrating their position sector by sector. By allowing bigger, muscular and well connected business entry into banking it could lead to further concentration of power.

We have recently witnessed IL&FS, the Nirav Modi scam at PNB, the implosion of the Punjab and Maharashtra co-operative bank scams. 

This reflects the need of strong supervision and well thought out regulation which we don’t have right now. The big corporate houses are faster in creating ways of circumventing regulations. Stringent checks and balances will need to be put in place before the Central bank contemplates any such step.

We have had a history of private corporate banking systems over two decades after independence. Before nationalisation of banks in 1969, India`s banking system was in the hands of the private sector. Most of these were in the form of joint stock companies controlled by big industrial houses. The Tata`s and Birla`s are one of these. 

At that time corporate houses used to use low cost depositor’s money into their group companies. It was the time of connected lending that led to imprudent lending and finally ballooned into failure of banks. During 1947-58, almost 350 banks failed.

The lending by these banks  were concentrated to a few organised sectors only. Therefore the farmers, small entrepreneurs, artisans and self employed were dependent on informal sources to meet their credit needs. 

This situation was handled in the past by nationalisation and later by liberalising our banking system. These new reforms can lead us to the situation of the early 1960s in terms of connected lending, authoritative cronyism, banking fraud as well as failure. Shell companies can increase.

These new reforms are without teeth and look like a favour to big corporate houses which can then lead to concentration of economic and political power in a few hands only. 

Modern day oligarchy is nothing but politician businessmen hand-in-glove. We should vehemently oppose it.

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