No bank licence to India Inc: RBI sees threat to financial stability

The regulator’s main concern is that if large business houses take a controlling stake in banks, tracking the money trail and its end-use might become challenging
The Reserve Bank of India (RBI) has stuck to its traditional stand of restricting large corporates from promoting banks.

In informal discussions with the government in the context of the new privatisation policy that is in the planning stage, the RBI has communicated its stand on the matter, sources familiar with the developments said.

The NITI Aayog had recently recommended to the government that long-term private capital should be allowed into the banking sector. It also suggested giving banking licences to select industrial houses with the caveat that they didn’t lend to group firms. 

The regulator’s main concern is that if large business houses take a controlling stake in banks, tracking the money trail and its end-use might become challenging. Also, despite adequate checks and balances and a tight corporate governance framework, companies may still find ways to bypass the system which, in turn, can have huge ramifications for the financial stability of the banking sector.

Ashvin Parekh, an independent financial consultant, said allowing large corporate houses into banking might destabilise the financial system.

The RBI, it is believed, has effectively closed the option by suggesting that if large business houses were to be allowed to operate banks, the entire conglomerate’s financials must also come under the central bank’s scrutiny. This suggestion has not found favour and, hence, the question of allowing large corporate houses into banking will not materialise, the sources said.

Most developed countries, too, have moved away from the model of banks being owned or controlled by large business houses, especially after the 2008-09 global financial crisis.

This has also been a consideration for the RBI to veto the NITI Aayog’s proposal on the matter, said another person aware of the development. Instead, it is gathered that the regulator is open to having a widespread institutional ownership in banks to decentralise powers and decision-making and enhance corporate governance.

Another important reason for the RBI to turn down the suggestion was that the idea could set a bad precedent.

“Once a license is made available to a business house, others will follow. We cannot be favourable to one and reject the others,” the person said.

Last year, Indiabulls Housing’s proposal to merge with Lakshmi Vilas Bank did not get the regulatory nod, which, according to some, could be due to the group’s diverse business interests, mainly in the real estate sector. Barring IndusInd Bank, promoted by the Hinduja group, which received its banking licence in 1994, there are no large banks owned or controlled by business conglomerates in India. In 2013, when the RBI called for banking licence applications, several business conglomerates, including the Aditya Birla group, Larsen and Toubro, and Shriram Capital, had applied. But only IDFC Bank (now IDFC First Bank) and Bandhan Bank made the cut.

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