November 29, 2020

No to Corporate run Banks

THE Internal Working Group (IWG) of the Reserve Bank of India has proposed allowing large corporates and industrial houses to own banks by amending the Banking Registration Act, 1949. The other proposal is to allow large non-banking financial companies (NBFCs) with asset size of Rs 50,000 crore and above (including those controlled by corporate houses) and with a track record of a decade, to convert themselves to banks.

These recommendations actually indicate the intent of the Modi government to open the banking sector to big business houses.  These are dangerous proposals which will harm the financial system and put people’s savings at risk.

If these steps are taken, then the Ambanis and Adanis can directly apply to start banks and the NBFCs already run by corporates can be converted into banks. Existing NFBCs owned by Tatas, Aditya Birla group and Bajajs can become banks. Banks run by corporates and industrial houses will enable them to access depositors’ savings and divert them to related or interconnected enterprises.  Given the state of regulation in the financial sector, promoters of the banks can easily circumvent the guidelines and exploit loopholes to corner resources for their own non-financial business interests. 

Banks run by corporate houses will invite further moral hazard and total distortion of the allocation of credit.  It will lead to the exclusion of farmers and small and medium industries from accessing credit.  Bigger companies belonging to the financial-industrial conglomerates will obtain loans on favoured terms. 

One of the principal objectives of bank nationalisation of 1969 was to break the unholy alliance between big business houses and banks that seriously distorted the allocation of credit and excluded major sectors such as agriculture and small and medium industries and thereby depressed the rate of growth of the economy and proved to be the major obstacle for poverty eradication. 

In the old days, before nationalisation, the United Commercial Bank favoured the Birla firms, the Oriental Bank of Commerce favoured the Thapar companies, the Central Bank of India was linked to the Tata firms and the Punjab National Bank and Universal Bank of India were controlled by the Sahu-Jain group. 

Under the Modi government, when the economic oligarchy is controlling most areas of business and crony capitalism is flourishing, allowing corporate houses to control banks will be a regressive and harmful step. It can lead to concentration of capital and heightening inequalities.

The licensing of a new generation of private banks began in 1993.  But it was only in 2013, during the UPA government, that the RBI guidelines to apply for banking licenses were changed to make non-financial corporate entities eligible.  Their entry when permitted was to be subjected to rules such as functioning through a Non-operative Financial Holding Company as a means to ring-fencing financial activities or banking operations from the non-financial business of these entities.  However, despite these guidelines, none of the 14 licenses issued so far have gone to corporates. Only two licenses were issued after 2013 to IDFC and Bandhan Bank, which were financial entities and not non-financial corporates.

The record of the new generation of private sector banks licensed since 1993 has not been inspiring, only nine are in existence, as of now.  Some of them were spectacular failures such as the Global Trust Bank and Yes Bank, the promoters of the latter are facing charges of fraud and money-laundering. The private banks have been increasing their share of advances after 2015 only because of the rising non-performing assets (NPAs) in nationalised banks.  These NPAs rose sharply because of overexposure to a few favoured corporates, mainly in infrastructure, at the instance of the government. 

But the 2013 guidelines began a process of eroding the caution exercised since bank nationalisation that corporates should not be involved in running banks.  The IWG report takes this forward and provides a rationale for corporates and industrial houses to run banks by stating: “They can be an important source of capital and can bring in their experience, management expertise and strategic direction to banking”.  It is strange that the IWG took this stance, despite the fact that of the ten experts in the field consulted, all except one were against corporates and industrial houses being allowed to promote a bank. This raises the suspicion that the IWG proposals were prompted by the government. 

There has been a strong reaction to the RBI move by a cross section of financial experts and former bankers and economists. The former RBI governor, Raghuram Rajan and former deputy governor, Viral Acharya, have both come out against the move.  Rajan has said, it risks “greater concentration of economic and political power”. He further apprehended that it is motivated by crony capitalism. The opposition of these two former bankers is significant as they are supporters of private sector banking. 

The Modi government is vigorously pursuing the privatisation of the financial sector. For this, it is working to weaken public sector banking through disinvestment and eventually privatisation of some of the public sector banks.  In the case of, the Lakshmi Vilas Bank, which was failing, the RBI has permitted a foreign bank, DBS, to take it over.  The time may come when some of the weaker public sector banks may be handed over to a private bank which is corporate-controlled. 

The Modi government must not be allowed to destroy public sector banking by allowing corporates and industrial houses to own and run banks.

(November 25, 2020)