Govt mulls to allow corporates to take over banks

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The Internal Working Group (IWG) of the Reserve Bank of India has proposed allowing large corporates and industrial houses to own banks by amending the Banking Registration Act, 1949. The other proposal is to allow large non-banking financial companies (NBFCs) with asset size of Rs. 50000 crore and above and with a track record of a decade, to convert themselves to banks. These recommendations actually indicate the intent of the Modi government to open the banking sector to big business houses. However, these are dangerous proposals which will harm the financial system and put people’s savings at risk. If these steps are taken, then the Ambanis and Adanis can directly apply to start banks and the NBFCs already run by corporates can be converted into banks. Such banks run by corporates and industrial houses will enable them to access depositors’ savings and divert them to related or interconnected enterprises.

One of the principal objectives of bank nationalisation of 1969 was to break the unholy alliance between big business houses and banks that seriously distorted the allocation of credit and excluded major sectors such as agriculture and small and medium industries and thereby depressed the rate of growth of the economy and proved to be the major obstacle for poverty eradication. In the old days, before nationalisation, the United Commercial Bank favoured the Birla firms, the Oriental Bank of Commerce favoured the Thapar companies, the Central Bank of India was linked to the Tata firms and the Punjab National Bank and Universal Bank of India were controlled by the Sahu-Jain group. Under the Modi government, when the economic oligarchy is controlling most areas of business and crony capitalism is flourishing, allowing corporate houses to control banks will be a regressive and harmful step. It can lead to concentration of capital and heightening inequalities. Notably, the licensing of a new generation of private banks began in 1993. But it was only in 2013, during the UPA government, that the RBI guidelines to apply for banking licenses were changed to make non-financial corporate entities eligible. However, their entry was to be subjected to rules such as functioning through a Non-operative Financial Holding Company as a means to ring-fencing financial activities or banking operations from the non-financial business of these entities. Despite these guidelines, only two licenses were issued after 2013 to IDFC and Bandhan Bank, which were financial entities and not non-financial corporations.

There has been a strong reaction to the RBI move by a cross section of financial experts and former bankers and economists. The former RBI governor, Raghuram Rajan and former deputy governor, Viral Acharya, have both come out against the move. Rajan has said it risks “greater concentration of economic and political power”. He further apprehended that it is motivated by crony capitalism. The opposition of these two former bankers is significant as they are supporters of private sector banking. Meanwhile, the Modi government is vigorously pursuing the privatisation of the financial sector. For this, it is working to weaken public sector banking through disinvestment and eventually privatisation of some of the public sector banks. The Modi government must not be allowed to destroy public sector banking by allowing corporates and industrial houses to own and run banks.

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