Rajan against corporates entering banking space

Even as new banking licences are expected any day from now, Prime Minster's economic adviser Raghuram Rajan continued to voice his opposition to letting corporates enter the space, saying their entry cannot help improve competition or solve the gaps in the banking system.

"I think the old Reserve Bank policy of not allowing corporates enter the banking space was a good one. I still stand by that. Whether that will continue or not is a different question now," Rajan said.

Calling for strict monitoring of corporates if they are allowed to offer banking services, Rajan said, "RBI should ensure that there is no intra-company lending, there is proper risk management system in place and they follow complete transparency in their operations." "Otherwise there will be problems," he warned.

The Reserve Bank was supposed to issue the final guidelines on new bank licences yesterday. But as the finance ministry is yet to revert to its draft proposals, the central bank could not meet the government-set deadline of March 31.

There are reports that North Bloc is not supporting the stringent guidelines that the RBI want to slap on new entrants, such as cap on FDI at 49 percent, and compulsory financial inclusion programmes among others.

Rajan, who is the Distinguished Professor of Finance at the Booth School of Economics of the University of Chicago, was talking to newsmen after delivering the birth centenary lecture of the HDFC founder, the late HT Parekh, here today on ''the proper role of the government in India.''

More importantly, he said, in the eventuality of corporates being allowed to open banks, the RBI should not encourage their rapid growth. .