It is to be hoped that we finally get some new banks now that the Reserve Bank of India (RBI) has put out its discussion paper on new banks. With over 14,000 persons being served by each bank branch, India is woefully underbanked. But it is not clear who will set up more banks. The discussion paper leans against having corporate firms set up banks and gives a host of reasons for this.
The principal one is that company owners will probably misuse the banks they own and will use this to get more loans sanctioned to group companies, often through a series of front companies. This may or may not be correct, but it points to a serious lacuna in the entire supervision process. If you are to assume that it is easy for a company to get away with this, why is it not possible for non-corporate-owned banks to do the same? And does it mean the RBI’s much-vaunted supervisory system is not able to catch this? If not, it is a serious indictment of the process.
RBI, it appears, is keen to learn from the mistakes of the Korean chaebols and its recommendations are in line with the practice in countries like the US. But while it is true the US does not allow corporate houses to own banks, the banks in the US spectacularly collapsed even without this. Banks collapse for a variety of reasons; no one-size-fits-all prescription seems to work.
Ajay Puri, New Delhi