Not a Bankable Idea

Ignoring the advice of experts, the RBI’s Internal Working Group has recommended the entry of business houses into the banking sector. This can have dangerous repercussions for depositors and shareholders

- Shivanand Pandit

WITH the intention of introducing comprehensive reforms in the banking sector, the RBI’s Internal Working Group (IWG) has decided to permit big corporate and industrial outfits to own banks. According to the report of the IWG, business firms can openly apply for license or those dealing in lending activities can transmute their prevailing businesses to a bank.

Two crucial stipulations have been introduced by the working group to support this move. One is an amendment in the Banking Regulation Act 1949 which deals with connected lending and exposures between the banks and other financial and non-financial group units. According to Section 20 of the Act, banks cannot provide any loans or advances to directors. Secondly, to reinforce the RBI’s guiding method for large companies, the group has recommended that the regulator may scrutinise the relevant judicial provisions to prepare itself for the mammoth task.

If these suggestions get the green signal, it will mark the re-entry of India Inc into banking after four decades; the last round of bank nationalisation took place in 1980.

For the first time, the watchdog has moved beyond the normal terms on promoters’ eligibility and net worth and set a minimum threshold on assets requirement and operational record. The group has proposed to allow large non-banking financial companies (NBFCs) having at least 10 years’ record with an asset size of more than Rs 50,000 crore, including those within the fold of business firms, to convert to banks.