The Yin and Yang of corporate-run banks

An RBI panel’s advice last Friday that India open up bank ownership to its large corporate houses has stirred up a hornet’s nest—with as many opposing the move as the ones supporting it.  The idea that large corporate houses be allowed to run banks is not new. This is permitted in many countries.

India, till it went in for a bout of bank nationalisation in 1969, too had banks run by some of its strongest industrial houses. The RBI panel’s proposal is to allow large corporations with assets of over Rs 5,000 crore to set up banks and run them at arm’s length to prevent connected lending to group entities. The problem for India with this otherwise-excellent idea is its unique banking history.

The financial crisis of the 1950s and 1960s that led to the rather drastic step of nationalisation of most large banks in the country was caused by India’s ‘Richie Rich class’ treating banks run by them as personal piggy banks. Promoters more often than not borrowed  from their own banks for business ventures run by friends and family.

The loans were often without due diligence, leading to a mountain of unpaid debt and huge losses for depositors. But reformers argue that fears of a repeat can be easily addressed by laws that enforce strict separation between ownership and credit disbursement and stern supervision by the RBI. They also point out state ownership of banks has also led to accusations of similar crony lending. 

There are other critics who point out that India’s NBFC or shadow banking sector is already facing a similar problem on this very count. One of India’s largest privately run banks and people connected with it are facing charges of connected lending of large sums to friends of those who ran that bank.

Many also point fingers at ‘crony’ capitalism being behind the stupendous growth in wealth of some of India’s biggest business houses during the pandemic. Nevertheless, reforms cannot be stymied on the basis of mere fears and apprehensions, especially if they are accompanied by logical, well-laid-down laws that are strictly enforced.