BQ Exclusive: Is Corporate Entry Into Banking Being Suggested To Help Only A Few, Asks Raghuram Rajan

Rajan’s comments come in response to a recommendation from an RBI internal working group to permit corporate houses to vie for banking licences, provided The Banking Regulation Act, 1949, is amended to deal with the risk of inter-connected lending and enable consolidated supervision.

Speaking to BloombergQuint, Rajan said the experience across geographies has shown that the temptation of corporate-driven banks to lend to themselves, what’s called self-lending, is significant. “This happens more in bad times when the industrial house is in trouble, a time when the bank should be exercising extreme caution. Of course, if you are owned by the borrower, it’s very hard to make that distinction.” The second reason, Rajan said, is the undue concentration of economic power.

Detailing the global experience, Rajan said that regulations such as the Glass-Steagall Act in the U.S. has drawn a line between banking and commerce and prevented large conglomerates from owning banks. In Japan, the Zaibatsus, a term used for integrated financial and industrial conglomerates, were believed to have led to concentration of economic and political power, which eventually led Japan into war. These structures were later discouraged. In Germany too, large combines were eventually broken up.

The former governor, who oversaw the grant of two banking licences in 2014 and the move towards on-tap bank licensing, said that it is very difficult in India to determine “connected lending”.

Simply amending the Banking Regulation Act, as suggested by the RBI internal working group, may not be adequate to curb the risks emerging from permitting corporate houses into banking.

“When things are still quite murky, when we have only modest confidence in accounting, when we’re still working on making sure supervision is stronger and we have minute by minute evidence of where the money is flowing....when we don’t have any of this in place, simply laws will not make a difference,” Rajan said.

The broader question to ask, he said, is why now?

Backdoor Entry

The internal working group has also suggested permitting payments banks to apply for a transition to small finance banks within three years of operation. It has also said that non-bank lenders can seek a bank licence, even if they are part of a broader corporate house, subject to certain conditions.

Rajan cautioned against both these suggestions.

“When we thought of payments bank licences, it was a way to get payments and inclusion done by potentially some industrial and telecom houses, but with no access to credit. Everything collected by these payment banks had to be invested in bank deposits or government securities,” Rajan, who introduced the concept of payments banks, said.

Later, when the door was opened to a conversion of payment banks into broader fuller service banks after a five year period, the idea was that some of the financial companies running these entities could be considered, Rajan said.

A similar principle holds for the conversion of NBFCs part of a large corporate house into a bank, he argued.

Industrial houses can offer financial services but when it comes to deposit taking, we should put a barrier, Rajan said. Else, it becomes too easy to raise the money and you become too-big-to-fail in the eyes of the country.