RBI working group’s proposal to allow business houses into banking a ‘good-looking’ step in ‘bad direction’, says Kaushik Basu

By: |
November 26, 2020 3:15 PM

Basu further said that 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 organizations on the other.

chief economist of World Bank Kaushik Basu, RBi, proposal for corporate house to set up bank, crony capitalism, Internal Working Group (IWG) set up by the Reserve Bank of IndiaChief economist of World Bank Kaushik Basu (IE Image)

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, former chief economist of World Bank Kaushik Basu said on Thursday. Basu further said that 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 organizations 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,” he told PTI. Basu, who was also chief economic adviser during the UPA period, said at first sight, this may look good because 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 such connected lending is almost invariably a step towards crony capitalism, where a few big corporations capture the business space in the country, slowly edging out the smaller players. “Also, connected lending can lead to eventual financial instability,” he argued. Last week, an Internal Working Group (IWG) set up by the Reserve Bank of India (RBI) made various recommendations, including that large corporates may be permitted to promote banks only after necessary amendments to the Banking Regulation Act.

“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. India’s Banking Regulation Act, 1949, which was originally the Banking Companies Act, 1949 is a very well-crafted law, the eminent economist said adding it reflects the sophistication of the founders of modern India. Basu, however, noted that times have changed and there are reasons to amend some parts of it.

“I think creating avenues for some Non-Banking Financial Companies (NBFCs), which are not controlled by industrial houses, into proper banks is worth considering seriously. “But the change in law that will allow industrial houses to own and run banks is a completely wrong move and a recipe for two possible outcomes — crony capitalism and financial crash,” he opined.

Recently, former RBI Governor Raghuram Rajan and ex-Deputy Governor Viral Acharya in a joint article had said that the RBI working group’s proposal to allow corporate houses to set up banks is a “bombshell” and at this juncture, it is more important to stick to the tried and tested limits on involvement of business houses in the banking sector.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1DHFL resolution: Lenders approve resolution plan submitted by Piramal Capital and Housing Finance Limited
2Bank credit grows 3.2 pc in first nine months of FY21
3RBI for more measures to improve governance at banks, NBFCs: Shaktikanta Das