Staff writers of the International Monetary Fund (IMF) today cautioned the Reserve Bank of India against giving licences to industrial houses to set up banks. And, commended the draft guidelines on keeping out those with real estate and brokerage businesses.
“International experience has supported the prudent policy position of disallowing industrial houses from promoting and owning banks,” went an update on the ‘Financial system stability assessment of India’ put out by the IMF.
Recently, Nobel laureate Joseph Stiglitz had also advised against giving licences to industrial houses for setting up new banks. C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, had suggested preference be given to the non-corporate sector in issuing these.
However, the IMF report clarified these were not the views of the Fund’s executive board but of the staff team. The latter support the RBI draft guidelines for acknowledging the risks in issuing new licences. It says these are sought to be addressed through several prudent means — those with greater than 10 per cent income from assets in volatile sectors like real estate and brokerage are not eligible, for instance.
The finance ministry recently wrote to the central bank to drop this clause while issuing the final guidelines, as RBI had already spoken of ring-fencing banking companies from other commercial and industrial activities within a group.
The IMF update also praised the RBI draft norms for suggesting a non-operating holding company, which cannot be leveraged, must be set up to hold all the financial entities in the group and in turn be supervised by RBI as a non-bank finance company. The report also noted the draft norms had said half the directors (increased to a majority in some cases) must be independent of the promoter, and the bank, group entities, non-operating holding company and promoter would be subject to RBI’s consolidated supervision.