Corporate Houses in Banking – UPSC Prelims

Context: RBI has decided not to open up the banking sector for industrial and corporate houses.
Pros of allowing Corporate Houses in Banking:
  • Corporate houses will bring capital and expertise to banking.
  • A move towards liberalization: Very few countries bar entry of corporate houses in banking.
  • India needs more banks to cater to the diverse needs of both businesses and consumers.
  • To improve innovation: More competition in the banking sector will increase innovation and help improve the flow of credit.
  • Poor performance of state-owned banks: The Indian banking sector is dominated by state-owned banks, which as a group are not in a position to cater to the needs of the Indian economy. This is due to a variety of issues, including recurrent asset quality problems.
Cons of allowing Corporate Houses into Banking
  • Interconnected lending: corporate houses can use banks to provide finance to customers and suppliers of their businesses. There are challenges to the tracking of interconnected lending:
    • Inadequacy of legal and supervisory mechanism: to trace the illegal routing of funds by corporate houses.
    • Political connection of corporate houses: can thwart the cooperation of various law enforcement agencies aimed at monitoring illegal corporate transactions.
    • Limited capacity of the regulator: RBI can only react to interconnected lending ex-post.
    • Dent on the regulator’s credibility: pitting the regulator against powerful corporate houses could end up damaging the regulator.
  • Concentration of economic power: corporate houses can easily turn banks into a source of funds for their own businesses/cronies, and the depositors may have to be rescued through a safety net.
  • Exposure of public safety net: banks owned by corporate houses will be exposed to the risks of the non­bank entities of the group.

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