Economists Raghuram Rajan and Viral Acharya have strongly criticised
a recent proposal by a Reserve Bank of India (RBI)
panel to allow large corporate groups
into the banking sector, calling it a “bombshell” move that could further
exacerbate the concentration of economic and political power in “certain
business houses”.
In a joint
note published on Monday afternoon, the
duo, both of whom are former RBI officials, have also questioned the timing of
the move, suggesting that the Narendra Modi government may want to “expand” the
set of potential bidders when it finally starts privatising
India’s public sector banks.
“While the [RBI internal working group’s] proposal is
tempered with many caveats, it raises an important question: Why now? Have we
learnt something that allows us to override all the prior cautions on allowing
industrial houses into banking? We would argue no. Indeed, to the contrary, it
is even more important today to stick to the tried and tested limits on
corporate involvement in banking,” Rajan and Acharya
write.
“The rationales for not allowing industrial houses into
banking are then primarily two. First, industrial houses need financing, and
they can get it easily, with no questions asked, if they have an in-house bank.
The history of such connected lending is invariably disastrous – how can the
bank make good loans when it is owned by the borrower?”
On November 20, the internal working
group released its report that reviewed a number of regulations surrounding
bank ownership guidelines.