The RBI working group’s proposal to allow corporate houses to set up banks is a “good-looking’’ step in a “bad direction’’ and may lead to crony capitalism and eventual financial instability, World Bank former chief economist Kaushik Basu has said.
Kaushik Basu, World Bank former chief economist
New Delhi:
Basu said there is a good reason why all successful economies have a clear dividing line between industries and corporations on the one hand, and banks and lending organisations on the other.
“The proposal from the recently set up Internal Working Group of the Reserve Bank of India, allowing Indian corporate houses to own and run banks is a good-looking step in a bad direction.”
Basu said at first glance, this may look good as the close connection between industrial corporations wanting to borrow and banks wanting to lend speeds up lending activities and makes the banking sector look more efficient. But, connected lending can lead to eventual financial instability.
“There is a lot of evidence that connected lending was the biggest cause of the build-up of bad loans in 1997 in Asia, which resulted in the East Asian Crisis that began in Thailand and turned out to be one of the biggest financial crashes in the world,” he pointed out.
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