Corporate Ownership In Indian Banking A Risky Proposition, S&P Global Says
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Corporate Ownership In Indian Banking A Risky Proposition, S&P Global Says

The recommendations of the Reserve Bank of India’s internal working group allowing corporate ownership of Indian banks is fraught with risks, according to S&P Global Ratings.

“The RBI will face challenges in supervising non-financial sector entities, and supervisory resources could be further strained at a time the health of India’s financial sector is weak,” the global rating agency said in a statement.

The working group’s concerns regarding conflict of interest, concentration of economic power, and financial stability in allowing corporates to own banks are potential risks, S&P said. Corporate ownership of banks raises the risk of intergroup lending, diversion of funds, reputational exposure and the risk of contagion from corporate defaults to the financial sector increases significantly.

The working group—constituted by the nation’s central bank to examine and review the extant licensing and regulatory guidelines relating to ownership and control, corporate structure and other related issues—proposed entry of large industrial houses only after necessary amendments to the Banking Regulation Act of 1949, and strengthening of the RBI’s supervisory arm.

The performance of new banks set up in India over the past three decades has been mixed. Of the 14 new universal bank licences issued by the RBI since 1993, Global Trust Bank and Yes Bank Ltd. had to be bailed out by government-owned banks, S&P Global said.

A change in regulation by itself would not lead to the RBI liberally allowing corporates to start a bank, the rating agency said. The RBI’s ‘fit and proper’ criteria for banks give it large latitude in decision-making. It would be important to see how many of these recommendations are adopted by the banking regulator as norms, S&P’s statement said.

The working group headed by PK Mohanty also recommended raising the cap for maximum promoter stake in a private bank, allowing large non-banking finance companies with an asset size of Rs 50,000 crore and above to convert to banks and reducing the qualifying period for payments banks to convert to small finance banks.

According to S&P Global, the recommendations regarding large NBFCs could offer them with greater access to funding, in particular low cost of deposits. But the path to becoming banks will not be easy for these companies.

“...the finance companies that are converting into banks will have huge upfront regulatory costs. They will incur additional costs in terms of cash reserve ratio and statutory liquidity ratio requirements; priority sector lending; and adjusting their existing portfolios to reduce concentration in one segment,” S&P Global said.

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