The Risk of Banking Licences to Big Business Houses

An internal working group of the Reserve Bank of India has suggested that large business groups including NBFC (with an asset size of ₹ 50,000 crores or more) should be allowed to promote banks in India. The reasons for such a suggestion has been cited as international practices and possible ‘management expertise, and strategic direction’ that these groups may bring into the banking sector. For a capital starved economy like India, it may prove to be a good decision to bring in more capital (which economy needs at this point of time post COVID havoc). However for four decades (last round of nationalization of banks in 1980), business groups haven’t been allowed to promote banks in India. Such a sweeping decision by the RBI would be revolutionary as it has earned a distinction of an extremely cautious and conservative banking sector regulator!

But the report itself as well as the previous experiences suggests that there would be an issue of conflict of interests. Perhaps it was the reason because of which except one, no expert has supported this idea. Before the nationalization, most of the banks were owned by the large industrial houses. In those old times, the banks used to lend a large chunk of total lending to the promoters and directors of the banks.

From the lists of wilful defaulters issued by different banks, it is evident that large numbers of the biggest defaulters are big business houses. In these events of wilful defaults, a weak corporate governance structure and culture has played a pivotal role along with the poor lending and debt restructuring practices followed by the banks. It would be prudent to not allow the big industrial houses to promote banks which have a very high risk of jeopardizing the economy.

Rajeev Upadhyay