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Daily Current Affairs – 2020

Topic: For Prelims and Mains

Bank Licenses to Corporate

Why in News

Recently, An Internal Working Group of the Reserve Bank of India (RBI) has recommended that corporate houses be given bank licences.

  • An Internal Working Group (IWG) of the Reserve Bank of India (RBI) has recommended conversion of big Non-Banking Financial Companies (NBFCs) into banks, hike in promoters’ stake and also a hike in minimum capital for new banks, among others.
  • The IWG, headed by PK Mohanty, was constituted by the RBI in June 2020, to review the extant ownership guidelines and corporate structure for private sector banks in India.

Major Recommendation of IWG:

  1. Large corporate/industrial houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulation Act, 1949(to prevent connected lending and exposures between the banks and other financial and non-financial group entities); and
  2. Strengthening of the supervisory mechanismfor large conglomerates, including consolidated supervision.
  3. Well run large Non-banking Financial Companies (NBFCs), with an asset size of Rs50,000 crore and above, including those which are owned by a corporate house, may be considered for conversion into banks subject to completion of 10 years of operations and meeting due diligence criteria and compliance with additional conditions specified in this regard.
  4. For Payments Banks intending to convert to a Small Finance Bank, track record of 3 years of experience as Payments Bank may be considered as sufficient.

Brief Background: First, the idea of allowing corporate houses into banking:

  1. In February 2013, the RBI had issued guidelines that permitted corporate and industrial houses to apply for a banking licence.
  2. No corporate was ultimately given a bank licence. Only two entities qualified for a licence, IDFC and Bandhan Financial Services.
  3. The RBI maintained that it was open to letting in corporates. However, none of the applicants had met ‘fit and proper’ criteria.
  4. The Committee had set its face against the entry of corporate houses into banking.
  5. It had observed, “The Committee also believes it is premature to allow industrial houses to own banks.

 

Significance:

  • It will meet credit demand of growing economy
  • It will increase competition in the banking industry that may be good for efficiency and innovation.
  • It will scale up the presence of India’s banks in the world rankings.
  • There will be more liquidity in the market & it will boost investment & economic growth.

Concerns/Challenges:

  • The prevailing corporate governance culture in corporate houses is not up to the international standard and it will be difficult to ring fence the non-financial activities of the promoters with that of the bank.
  • Over the years, the potential risks associated with connected lending have increased manifold because of the quantum leap in size and complexities in corporate India.
  • The pervasive use of front and shell companies makes it difficult to identify the actual owner of businesses.
  • Circular banking’ is another potential risk posed by corporate-owned banks because of the widespread prevalence of cartels in corporate India.
  • In India, incidents of frauds and defaults are increasing at an alarming rate across the spectrum.
  • Financial scandals have even occurred in some of India’s big corporate houses that have long prided themselves on being above-board.
  • Corporate ownership of banks would further concentrate economic power in the hands of a few corporate and industrial houses.
  • Increased economic concentration would have adverse effects on the domestic economy and politics. It would not only widen inequalities but would also lead to policy capture where special interests would shape public policies.

Conclusion:

In previous experiences where all stakeholders lost money and credibility have given rise to the need of new regulations with a very high degree of supervisory mechanism and corporate governance which has strong Information Technology (IT) and Artificial Intelligence (AI) enabled platform.

Where a corporate house is a promoter, strict regulations on the use of funds held with the bank and monitoring of related party transactions will be essential.

Fact for Prelims

Sumdorong Chu:

In 1986–87, there was a military standoff in the Sumdorong Chu Valley, located on the border of Tawang District, Arunachal Pradesh and Kona County, Tibet, between India and China.

This was the first military confrontation to take place on the disputed McMahon Line since the war in 1962, and fears of it intensifying were expressed.

 

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