While Raghuram Rajan often sounds like he is yet to come to terms with his effective removal from the Governorship of the Reserve Bank of India (RBI), he and his successor Viral Acharya do have a point when they panned the idea mooted by the central bank to allow the corporate sector to enter banking. In a piece, they argued that this would be devastating and would lead to “connected banking” and it isn’t hard to see their point of view. We have seen what happens with “connected banking” and the dramatic collapse of Yes Bank and the more recent rescue of Laxmi Vilas Bank by the RBI are cases in point. As Rajan and Acharya asked, “How can a bank make good loans when it is owned by the borrower?”
The central bank would be stupid to ignore the advice of their own former honchos as well as India’s top legal eagles that were consulted on this. India has had far too many banking disasters in the recent past for another one to be made through bad policy making. Even if the RBI promises to continue through regulatory oversight, the scandals involving Vijay Mallya and Nirav Modi highlight that promoters can bend the rules and cover their tracks (for a while at least) if they want to. Even if corporate-owned banks are prevented from giving loans to non-financial entities of the corporate, what will stop them from giving loans to relatives of bureaucrats and politicians in order to curry favour? Even in the best-run banks, allegations of underhand dealings and impropriety exist as we are learning in the case of ICICI Bank and their disgraced former chief executive against whom there are damning allegations. Instead, it would be more prudent for the RBI and the Ministry of Finance to explore possibilities of privatising India’s burdensome public-sector banks. Are the rule changes being made to assist one or two particular corporate groups in India and make them even stronger? Until the RBI and the government cannot answer this one question, one will assume it to be true. Ergo, this bad idea should be dispensed with forthwith. As for private lenders failing, just remember the lasting impact of the IL&FS fiasco.