Under Attack: IWG’s Recommendation to RBI in Favour of Large Corporates Owning Banks
This recommendation of IWG has been criticised and it has been vociferously voiced that the corporate house may provide undue credit to their own business or may favour lending to their close business associates and thereby leading to related party transactions by exercising pressure by a person who is higher in the hierarchy
Reserve Bank of India (RBI) in June 2020 constituted an Internal Working Group (IWG) to review extant ownership guidelines and corporate structure for Indian private sector banks and other related issues. The IWG submitted its report on 20 November 2020 which instantly became a criticised subject from several corners. Out of the several issues, one vital and most contentious issue that springs out from the recommendations of IWG is whether large corporate /industrial houses may be allowed as promoters of banks in India.
Broadly as we find in the report, the IWG accepted the concerns of allowing large corporate houses to own banks. More specifically, as it might be a right apprehension, this proposition may heighten the risks of misallocation of credit, connected lending, extensive anti-competitive practices, misuse of dominant position by few, and exposure of the government safety net established for banking to a broad range of risks emanating from commercial sectors of the economy. Further, all the risks relating to intra-group transactions and exposures, which are existent even otherwise, like transaction risks, moral hazard risks, risk of contagion, risk of reputation, might get highly magnified in case of corporate ownership of banks. It will no doubt be necessary to scale up the regulatory and supervision capacity significantly and effectively before even considering large corporate houses to promote banks. At the same time, the IWG also acknowledged the arguments in favour of allowing such entities as having been detailed in the report.
The IWG also noted a crucial factor that the tracking of money trail is basically an investigative function and not a supervisory function and the present legal and regulatory system seriously lacks effective and fast measures of investigative functions and swift implementation of the decisions. As a cautious approach, the IWG recommended that large corporate/industrial houses may be permitted to promote banks, only (and only) after necessary amendments to the existing law and legal frameworks are made. Based upon these discussions the recommendation was made to RBI that the large corporate/industrial houses may be permitted to promote banks only after necessary amendments to the Banking Regulations Act, 1949 to deal with connected lending and exposures between the banks and other financial and non-financial group entities; and strengthening of the supervisory mechanism for large conglomerates, including consolidated supervision.
This recommendation of IWG has been criticised and it has been vociferously voiced that the corporate house may provide undue credit to their own business or may favour lending to their close business associates and thereby leading to related party transactions by exercising pressure by a person who is higher in the hierarchy. This is widely voiced that the banking shall be concentrated in the hands of very few corporate houses, or concentration of economic power in those certain business houses. Supervision might be difficult when banking and commerce are combined as it would lead to the moving of financial troubles to the books of the bank it owns. Mixing industry and finance might lead to more dangers for growth, public finances, and thereby raise questions about the future of the country. It has even been dreaded that the Government may want the banks to be owned by the large corporate so that the Government would in future be able to sell several public sector banks at a good price to the corporate/industrial house in the banking space.
Now, it may be seen that the catch is hidden in the recommendation itself !! The IWG as conditions-precedent recommended the amendments to the Banking Regulations Act 1949, and also strengthening of the supervisory mechanism for large conglomerates including consolidated supervision, before such corporate/industrial houses are allowed to own banks.
In today’s scenario, amending the banking law(s) and introducing a stringent supervisory mechanism for controlling the large corporate/industrial houses can be far more effortlessly recommended by IWG, than actually be done by the legislatures. The corporate/industrial houses are certainly not easily amenable to open their records and account for stringent supervisory mechanism. And any such step taken in this direction shall, in accordance with the present trend, undoubtedly be subject to the highest judicial scrutiny. Given the present socio-political settings in India, the whole process of framing the right legal measures (as it may be) and implementation of them, is likely to take considerable years’ time, if not decades. Till then, the report of IGC recommends nothing significant in these field except the needs for the pre-conditioned corrective measures. The Report possibly does not even say that the Corporates are most welcome.
Therefore, is there any realistic reason for squeal or jumping the gun right now even before any one of the condition precedents are taken forward?
The views expressed above are the author's personal views only on the above report of the IWG.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
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