After Bandhan Bank Managing Director and CEO Chandra Shekhar Ghosh supported the entry of corporates into banking, ICICI Bank’s former CEO KV Kamath, too, has said corporations entering the banking sector is a good step, provided there are tight regulations.
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.
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An RBI internal working group (IWG) recently suggested that large NBFCs and corporate houses should be given banking permits for the sector to grow. The suggestion set off a huge debate, with many experts expressing views opposing the idea citing high risks. Among those who opposed the suggestions are former RBI governor Raghuram Rajan and former deputy governor Viral Acharya.
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.
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Kamath is one of the senior-most bankers in India and has played a critical role in building ICICI Bank as a major financial sector conglomerate. In May 2020, Kamath demitted officer as the President of BRICS-led National Development Bank.
Earlier, in an exclusive interview to Moneycontrol, Bandhan Bank MD and CEO Chandra Shekhar Ghosh, too, supported the proposal. "If corporates maintain good governance and best practices under the tight supervision of the RBI, then corporate entry into banking is good,” said Ghosh.
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 RBI working group’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,” the Rajan and Acharya said.
The RBI has given three rounds of private bank licences 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 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.