Non-Banking Financial Companies (NBFCs), owned by corporate house, having asset over Rs 50,000 crore can easily get a bank licence. The Reserve Bank of India (RBI) internal working group, in its report, stated that well-run NBFCs, with an asset size of above Rs 500,000 crore, including those which are owned by a corporate house, can be considered for conversion into banks.
The Internal Working Group (IWG) has proposed the idea of allowing large corporates to act as promoters of banks after necessary amendments of the Banking Regulations Act 1949. This, they explained, is to deal with connected lending and exposures between the banks and other financial and non-financial group entities. “Well run large NBFCs, with an asset size of Rs 50,000 crore and above, including those which are owned by a corporate house, may be considered for conversion into banks, subject to completion of 10 years of operations and meeting due diligence criteria and compliance with additional conditions specified in this regard,” it said. “The minimum initial capital requirement for licensing new banks should be enhanced from Rs 500 crore to Rs 1,000 crore for universal banks, and from Rs 200 crore to Rs 300 crore for small finance banks.”
A Bad Idea
However, former RBI governor Raghuram Rajan and Viral Acharya have called this a ‘bad idea’. They have warned the government against allowing large corporate houses stepping into the banking sector. Rajan and Acharya argue that since industrial houses need financing, they can get it easily, with no questions asked, if they have an in-house bank. The experts highlighted that such connected lending is invariably disastrous and wondered how a bank can make good loans when it is owned by the borrower. Rajan and Acharya observe that the recommendation to allow corporate houses in the banking sector is a ‘bombshell’.
“The RBI recognized the risk of excessive exposures to specific houses in 2016 by announcing group exposure norms, which limit how much exposure the banking system can have to specific industrial houses,” the experts said. “The IWG has suggested it is always difficult to discern the connections that make a borrowing entity part of an industrial house.” Moreover, Rajan and Acharya believe that corporate entry into banking will further exacerbate the concentration of economic and political power in certain business houses. They warned that even if the RBI allots the banking licences fairly, it will allow undue advantage to large business houses that already have the initial capital that has to be put up.