Carrot, stick for corporates to run banks

Handing over the banking licence to the corporate houses is a welcome gesture by the RBI. But the regulator must handle it with utmost care. The reason is that the corporate houses are normally borrowers, who are provided finances by our banks. If these corporates are given licence to run banks, then conflict of interest is the big issue that may often crop up.

History is the witness to it. At the time of Independence, all the banks in the country were owned by business houses, but none of them came forward to help the government in its planned economic development projects. On the other hand, these private banks were busy mobilising savings of the people and cornered the same for their own business interests. Because of this, many banks ran into problems and suffered from issues like conflict of interest. Finally, the government had to nationalise some of the major private sector banks, which proved to be a great step towards the overall economic development of the country.

The nationalised banks have been running so well that they are not only helping the overall economic development of the nation, maybe priority sector lending (PSL) and providing financial support to the marginal farmers. Besides, the state-owned lenders have faced the litmus test during Lehman Brothers' crisis in 2008 very well by tightening their belt.

Again, the nationalised banks, which often run on the whims of the powers that be at the Centre, are plagued with piling of bad loans and scams for which the government has to come forward for their rescue.

So, allowing corporates joining the bandwagon of banking ok, to the extent that their functions are monitored strictly. It means that like state-owned lenders, these private sector banks must be made to shift their focus from commercial gains to social development.

Raghuram Rajan, former RBI governor, has rightly pointed out that it is even more important today to stick to the tried and tested limits on corporate involvement in banking.

Even if banking licenses are allotted fairly, he goes on, it will give undue advantage to large business houses that already have the initial capital that has to be put up. Moreover, highly indebted and politically connected business houses will have the greatest incentive and ability to push for licenses.

Yes, our banking system is robust and the government never allows the banks to play with the hard-earned money of the depositors and the cases of Yes Bank and Laxmi Vilas Bank can be the best examples for the same.

Besides, NBFCs entering into banking sector may not be a bad idea keeping in view their strong presence in the far-flung rural areas where the conventional banks are yet to reach. The only issue is that these NBFCs must be kept away from the conflict of interest muddle. It is here the RBI needs to come up with strict norms.