Companies in Banking? Wrong Debate

Context:  There are bigger issues to be addressed in banking sector than the ones associated with allowing business houses in banking.

Problems associated with Indian banking Sector

• Issues associated with allowing business houses in banking.
  • Connected lending and exposures between banks and other businesses
  • Concern of supervisory mechanism for large conglomerates
  • Increase economic and political inequality: It will further exacerbate the concentration of economic (and political) power in certain business houses
• Businessmen having a free run of public money:  Shady business houses in India have a free run of public money in public-sector banks (PSBs) thus businessmen did not need to own a bank to have a free run on public money
• Rising bad loans of PSBs: A former deputy governor of the RBI estimates that bad loans of PSBs are at Rs 20 trillion.
  • Tax payers’ money spends to solve bad loan issue: Government has announced Rs 2.11 trillion of taxpayers’ money to be injected into PSBs.
• Governance issues: Deep corruption (meddling politicians and crony capitalism), zero accountability, stark regulatory failure, and repeated recapitalisation of PSBs
• Bending RBI’s licensing norms to get banking license: g. Hindujas, a business house with  a controversial record and extensive overseas and unlisted operations got banking license
• Concerns related to regulatory accountability of Reserve Bank of India (RBI)

The key to enable business houses in banking sector

• RBI should use its extensive powers: By improving the quality of licensing and supervision, only good business houses will be attracted to the banking sector.
  • The powers of RBI given Under Section 35 and Section 36AA(1) of the Banking Regulation Act includes the power to inspect banks, remove the chairman, director, chief executive officer (CEO), or any other employee of a bank etc...
  • The RBI can also conduct a special audit
• Necessary amendments to the Banking Regulation Act, 1949: As recommended by  internal working group (IWG) of the RBI.                                                                                                                                                                                 

Conclusion: The regulatory accountability of RBI and the issues of PSBs are the graver problems and should be addressed first before getting into debates on companies in banking.