Makes sense to keep industry, banking separate: RBI’s Rao

‘Banks access public money, can’t allow conflict of interest’

Reserve Bank of India Deputy Governor Rajeshwar Rao on Wednesday said while the RBI would examine the pros and cons of giving banking licences to large industrial houses, the fact that banking was a highly leveraged business dealing with public money meant it ‘made sense’ to keep industry and banking separate.

He was referring to a recent Internal Working Group (IWG) report on the topic.

“Many committees set up on the subject [of grant of banking licence] in the past as well the IWG have acknowledged that large corporates/ industrial houses can be an important source of capital and can provide management expertise and strategic direction, given their pool of entrepreneurial and managerial talent,” Mr. Rao said while addressing the Mint Annual Conclave.

“There is also the issue of finding fit and able promoters with deep pockets to set up a large, technologically equipped universal bank. At the same time, concerns were raised by all of them, including the IWG, on the attendant risks,” he added.

These included conflicts of interest via self-dealing at the expense of bank clients, favouring associates for extending loans and undermining the neutrality and independence in deciding allocation of credit and constricting the flow of credit to competitors.

“Caution was also warranted around issues of connected lending, complex web of group structures, cross-holding as well as presence of large number of unregulated entities in the group, as these would stretch the RBI’s regulatory and supervisory resources,” Mr. Rao said.

“Another oft-quoted argument also points to the principles of separation of banking and industry/business. While it is an accepted fact that the relationship between financial economy and real economy is symbiotic, de facto merger of the segments may actually aggravate systemic risks,” Mr. Rao said.

He said given that banking was a highly leveraged business dealing with public money, it made sense to keep industry/ business and banking separate.

“This separation is expected to avoid spill-over risks — where trouble anywhere in the group entity may result in transferring risks on to the depositors, leading in turn to claims on deposit insurance with subsequent ripple effects cascading across the largely interconnected financial systems, creating concerns around financial stability,” he said.

He said these issues had been flagged by the IWG also and therefore, “it is necessary that we closely examine related matters before thinking of permitting large industrial houses or NBFCs owned by such houses to set up any new bank.”

“To conclude, let me just say that the jury is still out on the issue,” he said.

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