Nobel laureate Joseph Stiglitz today said corporates should not be allowed to enter banking space as it has the potential to create conflict of interests.
"I think, the real problem in the financial sector are issues of conflict of interests. And when you have corporates opening their own banks, you are opening a venue for conflict of interests," Stiglitz said replying to a question on new banking licences expected to be issued by the Reserve Bank and interest shown by the corporates for the same.
Stiglitz drew parallels with the US scenario, specifically to the one concerning rating agencies to highlight the possibility of conflict of interest.
"You can only hope that you can monitor them and we hope that credit rating agencies do their jobs too," he said.
Stiglitz was in the city for delivering the C D Deshmukh Memorial Lecture organised by the Reserve Bank of India.
The Parliament has recently passed amendments to banking laws, which pave the way for the entry of new players into the arena.
A slew of corporates have evinced interest in entering the fray and ball is in the court of RBI, which is yet to come up with final guidelines regarding the eligibility criteria.
He also said the argument of bringing 'economies of scale' by giving licences to corporates did not hold water.
"The dangers of conflict of interest outweigh any economies of scale that I can bring up," Stiglitz said.
Drawing parallel between the debate in the western world regarding the conflict of interest with respect to separation of investment banking and pure banking operations, the world renowned economist also said that a Chinese wall can not be created between the two.
Referring to management of banking regulations, he said the RBI has done a commendable job both in avoiding the crisis as well as during the last four years since the crisis set in.