Have we learnt something that allows us to override all the prior cautions on allowing industrial houses into banking? "We would argue no", they opined. "Indeed, to the contrary, it is even more important today to stick to the tried and tested limits on corporate involvement in banking", Rajan and Acharya's joint statement, released on Rajan's LinkedIn handle, read.
Giving licenses to industrial houses will concentrate economic powers to these corporates.
They pointed out that if industrial houses need financing, they can get it easily, no questions asked, if they have an in-house bank. "As a part of the structural reforms that we have witnessed in the sector over the last few years, new licencees are likely to leverage India's data dividend and help build mobile-first digital challenger banks". If they are owned by industrial houses, it can lead to bad lending, the duo reasoned. The history of such connected lending is invariably disastrous, they said, wondering how a bank can make good loans when it is owned by the borrower.
The two noted that even an independent regulator finds it hard to check poor lending. Rating agency S&P Global on Monday said it was sceptical of allowing corporate ownership in banks given India's weak corporate governance amid large corporate defaults over the past few years. "These norms have been relaxed recently", the paper states. They add that as the WGI has suggested, "it is always hard to discern the connections that make a borrowing entity part of an industrial house".
"Some favoured ones are expanding merrily, financing assets purchases with yet more borrowing, imposing greater risks on the system", they wrote.
According to Rajan and Acharya, the second reason to prohibit corporate entry into banking is that it will further exacerbate the concentration of economic (and political) power in certain business houses. "Moreover, highly indebted and politically connected business houses will have the greatest incentive and ability to push for licenses", they said. "That will increase the importance of money power yet more in our politics, and make us more likely to succumb to authoritarian cronyism", they said. Can the regulator not discriminate between "fit and proper" businesses and shady ones? "Whether these conditions will always prevail is debatable".
Both Rajan and Acharya felt that once the bank license is given, the licensee's temptation will be to misuse it because of self-lending opportunities. "The bailout costs to the exchequer could be significantly more when it comes to bank licenses to industrial houses, which will start out big". After all, committees are rarely set up out of the blue. "Is there some dramatic change in perception that it is responding to?"
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The internal working group report itself points out that all but one of the experts it consulted were of the opinion "that large corporate/industrial houses should not be allowed to promote a bank", the authors stated.
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Rajan and Acharya said, "The rationales for not allowing industrial houses into banking are then primarily two".
"A second possibility is that an industrial house holding a payment bank license wants to transform into a bank. More importantly, why now, at a time when we are still trying to learn the lessons from failures like ILFS and Yes Bank?"
"In sum, numerous technical rationalisations proposed by the IWG are worth adopting, while its main recommendation - to allow Indian corporate houses into banking - is best left on the shelf", they opined.
It would be "penny wise pound foolish" to replace the poor governance under the present structure of these banks with a highly conflicted structure of ownership by industrial houses, they added. Regulations could not stop huge bad debt accumulation in banks.
"It is hard not to see these proposed amendments as a subtle way for the IWG to undercut a recommendation it may have little power over", Rajan and Acharya said, adding, while numerous technical points of the IWG recommendations are worth adopting, giving licenses to industrial houses is an idea "best left on the shelf".
24 Novembre 2020
24 Novembre 2020
24 Novembre 2020
24 Novembre 2020
24 Novembre 2020
24 Novembre 2020
24 Novembre 2020
24 Novembre 2020
24 Novembre 2020
24 Novembre 2020