Corporate banking: too risky an adventure to explore

NEW DELHI: The recommendation of the Reserve Bank of India’s internal task force to allow trading houses to set up banks was strongly opposed by two former central bankers and an economist. Although all three are deemed to be habitual critics of the current regime, their views on this issue should not be discounted.

Banking institutions are expected to provide security, with maximum possible returns for depositors while providing easy liquidity support at an economical cost to investors. It is a well-known practice among manufacturers to benefit from easy financial support wherever possible – whether it is to divert one’s own company to another or to promote a company to the detriment of the stakeholders in it. another. In this context, how can we expect a business unit not to use or misuse the funds controlled by a bank promoted by itself?

Having an in-house bank will give you easy access to funds without asking questions. What is the guarantee that these loans will not be amortized as in the case of Yes Bank or Gitanjali Jewelers? On the other hand, will competitors have the same access to funds as the bank’s promoter? Can it be said with conviction that the following banks will ensure that the rules of the game are non-discriminatory for all borrowers?

Recently, the Reserve Bank of India (RBI) rejected the business houses’ banking license applications. The relevant question is: what major changes have taken place in the space of a few years, also at a time when there is no liquidity crisis? On the contrary, the growth of non-food credit has slowed and in recent times banks have started to approach potential borrowers through phone calls and text messages with liberal loan offers.

While there have been such success stories as Kotak Mahindra Bank, it is also worth remembering the modus operandi of businessmen plundering public money with cases such as Nirav Modi and Yes Bank. To add to this disturbing picture of the financial landscape, we must keep in mind the rise of NPAs in the banking sector.

On the other hand, it has to be admitted that shadow lenders owned by industrial houses and conglomerates have performed well and have not been convicted of any wrongdoing. But are we sure that RBI will be able to rigorously control a bank’s loans to its group companies? Once again, the track record of Yes Bank, Lakshmi Vilas Bank and willful defaulters is growing. The arduous weight of a failed bank / voluntary NPA ultimately rests on the shoulders of the taxpayer’s money.

Given the rapidly changing dynamic macroeconomic and financial scenario, even considering that this idea might be justified, it would be fair to say that the RBI and the Ministry of Finance should put checks and balances in place as a first step. additional. . Before venturing into amending the Banking Regulations Act 1949, the central bank should be well advised to strengthen the existing financial framework so that the laxity observed in cases of IL & FS or any other cases of fraudulent siphoning from depositors’ money does not happen again.

If one were to take a close look at the recommendations of the RBI’s internal task force, the criteria for entry into banking should have been in terms of a certain amount of equity, assets or number of assets. ‘years of experience in related fields. What is the rationale behind three years in the case of payment banks and ten years in the case of NBFCs?

For the record, the working group seems cautious in suggesting to increase the equity capital of promoters from 15% now to 26% in 15 years. Here is the trap. If the group cared seriously about taking care of all stakeholders, it would not have recommended increasing participation beyond 25%. By the time it reaches 26%, the promoter is able to promote his own business interests. In addition, promoters should be excluded from the board and refrain from playing a role in recruiting staff.

However, if the central bank still thinks the proposal is worth experimenting with, why can’t it suggest that the government divest its stake in public sector banks for the benefit of business developers?

The central bank is supposed to play the role of regulator to protect the interests of depositors and savers while ensuring adequate liquidity support for investors. It is up to the government to provide a healthy business environment for different sectors.

Let the RBI continue to be the banking regulator and watchdog of the economy by keeping a safe link and a healthy distance from stakeholders.

Dr Jagadish Shettigar is Professor of Economics at the Birla Institute of Management Technology, Greater Noida. Dr Pooja Misra is Associate Professor, Economics, Birla Institute of Management Technology.

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