Did Shaktikanta Das just distance himself from RBI panel’s recommendation on corporate houses' entry into banking?

“It is a report of the IWG, not the RBI’s official view. The IWG has two external members. It has acted independently. They have given an extra point of view. The RBI has not taken any decision. Our approach is consultative (on this issue). The report is in public domain. After comments, we will examine and take a considered decision,” Das said.

Experts, including RBI's former governor governor Raghuram Rajan and former deputy governor Viral Acharya, came out openly in the public with strong criticism against the idea., while others, including former ICICI Bank CEO K V Kamath and Bandhan Bank CEO Chandra Shekhar Ghosh, supported the idea saying with enough regulations, corporate entry will be good for the sector.

Das’ comments are significant. If one reads between the lines, Das has distanced itself from the controversial suggestions amid the public backlash. In an article for Mint , Kamath said India should consider opening up the banking sector, letting corporates join the sector under tight supervision.

“Since India must broaden and deepen its financial system to achieve its national goals, we need to seriously consider letting corporate players in, albeit once appropriate checks and balances are in place to ensure systemic stability,” Kamath wrote.

Explaining his logic, Kamath said risks for allowing corporate houses in banking sector were true of any sector. “The question is how we mitigate this risk with checks and balances,” Kamath said.

Both Rajan and Acharya are strongly opposed to the idea of letting private businesses in the business of banking. In an article written jointly and shared on a social media platform, Rajan and Acharya described the IWG's most important recommendation—letting businesses own banks—as a "bombshell".

While the proposals were tempered with many caveats, they raised an important question, they said. “Why now? Have we learnt something that allows us to override all the prior cautions on allowing industrial houses into banking?” the authors said.

The RBI has been hesitant in letting large businesses promote banks. Rajan and Acharya questioned the urgency and timing of the proposal. “After all, committees are rarely set up out of the blue. Is there some dramatic change in perception that it is responding to,” they said.

In the appendix of the report, the IWG report said all experts it consulted barring one opposed the idea of corporate entry into banking. “Yet, it recommends the change,” Rajan and Acharya said.

The RBI has thrice issued licences to private banks since the nationalisation of banks. In the first round in 1993-94, the RBI gave licences to 10 private sector banks—Global Trust Bank Ltd, ICICI Bank Ltd, HDFC Bank Ltd, UTI Bank Ltd (renamed Axis Bank Ltd), Bank of Punjab, IndusInd Bank Ltd, Centurion Bank Ltd, IDBI Bank Ltd, Times Bank and Development Credit Bank Ltd. Some of these banks do not exist now as they were acquired by stronger banks.

In 2003-04, Kotak Mahindra Bank Ltd and Yes Bank Ltd were allowed in. In 2014, IDFC First Bank and Bandhan Bank were given the licence.

The IWG proposals have come with certain riders. Large corporate and industrial houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulation Act, 1949.

This is aimed at preventing connected lending and exposures between the banks and other financial and non-financial group entities and strengthening of the supervisory mechanism for large conglomerates, including consolidated supervision.

However, Rajan and Acharya aren’t confident that these changes will be enough. “If sound regulation and supervision were only a matter of legislation, India would not have an NPA problem,” Rajan and Acharya said in the article.