Strict bank regulations could let us open the sector wider

Context: RBI’s working paper that recommends giving bank license to manufacturing groups and business houses is an idea up for consideration, which needs to be openly evaluated.

Need for business houses in banking:

• India is Capital-starved: and needs credit spread to grow its economy in consonance with its populace.
  • Public sector banks (PSBs) have eroded their capital through a mix of poor lending decisions and politically-nudged free money to business cronies for the past many decades.
• Recapitalization through tax-payer’s money and borrowings has destroyed PSB’s balance sheets.
• Private banks find retail lending more profitable and less risky than corporate lending.

Issues with having business houses in banking:

• Resistance from the incumbents: Raising the caps on foreign holdings in insurance companies, for example, took years of negotiation by the government of the day with Left parties and worker unions.
• Concerns related to misuse of depositors money: Global best practices frown upon such bank ownership, and there are also issues of the concentration of economic power in a few hands.
• Concerns over regulations: There is little confidence in the Reserve Bank of India’s competence as an efficient and effective bank supervisor and regulator.

Way Forward:

• To facilitate private bank licenses:
• Policies and regulations can help institute a set of rules to prevent own-use and misuse of money.
• There can be a clear bar on own-company or associated-company use of money by the promoter group.
• RBI needs to use big data analytics and artificial intelligence to become effective as a regulator.

Conclusion: If we place good security walls around public money, we should be able to consider all ideas for growth. India needs capital, and we should use this moment to reform our banking regulations.