Should Corporates Own Banks? Should Corporates Own Banks? – Centre for Financial Accountability (cenfa.org) By Thomas Franco | March 4, 2022
“It would be difficult to undertake credit planning unless the linked control of Industry and Banks in the hands is snapped by Nationalisation of Banks,” said R K Hazari in the R K Hazari Committee’s report on Industrial Planning and Licencing Policy in 1966.
In 1993 with the liberalization policy and the conditions implemented by the World Bank & IMF, banking was extended to private players.
In 2013, Tata Sons, Bajaj Fin serve, Aditya Birla Nuvo, Reliance Capital were among 26 applicants along with India Bulls, and SREI Infra which are now in the NPA mess.
After 2014, things have further changed. The Corporates have found an easy entry into banking through Non-Banking Financial Companies.
As per the Banking Regulation Act, before granting any licence, the RBI requires to be satisfied that the following conditions are fulfilled.
that the company is or will be in a position to pay its present or future depositors in full as their claims accrue;
that the affairs of the company are not being, or are not likely to be, conducted in a manner detrimental to the interests of its present or future depositors;
that the general character of the proposed management of the proposed bank will not be prejudicial to the public interest or the interest of its depositors;
that the company has adequate capital structure and earning prospects;
that having regard to the banking facilities available in the proposed principal area of operations of the company, the potential scope for expansion of banks already in existence in the area and other relevant factors, the grant of the licence would not be prejudicial to the operation and consolidation of the banking system consistent with monetary stability and economic growth.
In November 2020, the Reserve Bank of India released a report of its Internal Working Group (IWG), which recommended that large corporate/industrial houses be permitted to promote banks,
Put together, the recommendations make way for corporate entry into banking, which has not been possible since the bank nationalisation of 1969
The risks mentioned in the IWG report such as misallocation of credit, conflicts of interest, extensive anticompetitive practices, risks relating to intra-group transactions, connected lending, circular lending, moral hazard risks, and the risk of contagion will come true.
In the meanwhile, the poor, low-income, and middle-income customers, who constitute the majority, will have to depend on NBFCs, the new Shylocks who will charge huge interest for loans. Income inequality will further increase. The oligopolies will not only control the financial system, but also the political system. Democracy will perish!