Daily Editorial Analysis for 2nd December 2020

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Why business barons should not run banks


Mains: G.S. III Issues related to Indian economy, Corporate banking, Banking in India.


  • An Internal Working Group of the RBI has recommended that corporate houses be given bank licenses.
  • In today’s pro-business climate, you would have thought the proposal would evoke great success. It should have been hailed as another big-bang reform that would help revert the dominance of public sector in banking.
  • Many analysts doubt the proposal will fly. It is worth examining why.
  • If you ask a fox that is in charge of the henhouse to promise not to eat the chicks if he is hungry, what would the fox say? You don’t give the keys of a henhouse to a fox. Not even to a virtuous fox.
  • But the Reserve Bank of India (RBI), the last guardian of India’s financial and banking system, wants to do just that.


  • In a joint paper posted on November 23, former RBI Governor Raghuram Rajan and former RBI Deputy Governor Viral Acharya termed the recommendations allowing corporates into banking a “bombshell” and said this proposal is “best left on the shelf”.
  • Referring to business houses owning an in-house bank that may lead to self-lending, they said, “The history of such connected lending is invariably disastrous — how can the bank make good loans when it is owned by the borrower?
  • Even an independent committed regulator, with all the information in the world, finds it difficult to be in every nook and corner of the financial system to stop poor lending.
  • Indeed, anything coming from Mr. Rajan or Mr. Acharya may be seen as being partisan or motivated by the present dispensation. But other experts have also not welcomed this move.

  • Professor T.T. Ram Mohan wrote in this newspaper, “If the record of over-leveraging in the corporate world in recent years is anything to go by, the entry of corporate houses into banking is a road to a punishment that will last forever.”
  • Hemindra Hazari, a well-known Securities and Exchange Board of India (SEBI) research analyst, wrote in an article titled ‘RBI’s working group recommends foxes be put in charge of chicken coops’.
  • Even under the existing financial regime, the RBI was unable to detect at an early stage the connected lending which felled large regulated financial entities like IL&FS, Yes Bank (Rana Kapoor and his entities held 10.6% as on end September 2018), Punjab and Maharashtra Co-operative Bank and DHFL (promoter holding 39%). Will it be able to effectively regulate and monitor large, complex industrial houses which are well versed in disguising financial transactions through a vast web of opaque domestic and foreign-based entities?”
  • India’s banking rules need to close door to tycoon cronyism.
  • The RBI is overlooking time-tested principles and limits of disallowing mega business houses from promoting and owning banks.
  • It is saying this can be done by making necessary amendments to the Banking Regulation Act of 1949 to deal with connected lending and linkages between banks and non-financial group entities, and strengthening the supervisory mechanism for conglomerates. This is in stark departure from its long-held opinion on the subject since 1969 when banks were nationalised.
  • History is full with evidence of business barons who were good when they started out only to eventually morph into robber barons who not only enriched themselves owing to their enormous wealth and nexus with politicians in power, but also crushed competition.
  • It will be naive to believe that a bank owned by a corporate house will permit lending to its competitors.
  • Public sector banks may be inefficient and indifferent and under the influence of the party in power but private sector banks that are owned by oligarchs and business tycoons in cahoots with politicians will be rapacious monsters.

The Way Forward

  • The way forward should be to privatise public sector banks by allowing wide and diversified holding of stock by the general public.
  • If the government exits banking ownership, that would lead to professional management and broader distribution of wealth. The banks would come under both SEBI and stringent RBI guidelines.
  • How can we expect virtue from modern-day business Maharajas when in the Mahabharata, even King Yudhishthira gambled away his wife, family and kingdom?

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