This refers to the report “Give preference to non-corporate sector for new banking licences: Rangarajan” (January 7). Earlier this week, Nobel-laureate economist Joseph Stiglitz expressed his discomfort at the idea of allowing corporate houses to own banks, saying it amounted to a conflict of interest. The corporate sector missed the bus earlier when the Reserve Bank of India (RBI) opened the financial sector to new-generation banks on the same ground that an industrial house cannot own a bank. Now, RBI prefers non-banking financial companies (NBFCs) and industrial houses to enter the sector. The fear of conflict of interest is exaggerated. It is wrong to assume that the corporate sector will necessarily misuse the banking channel. Even if the bank is not owned by an industrial house, it can have access to bank funds. There are umpteen rules (read prudential norms, industry exposure norms, etc) by which the regulator can check a bank from extending loans and advances massively to an industrial group. An NBFC entering the financial sector may also be owned by an industrial house. In the US and other developed countries, the financial sector got into the financial mess (remember the 2008 financial crisis?) without any industrial house owning it. It was because of the complex financial products that they clubbed under “financial innovations”.
C Rangarajan has said various other types of financial institutions currently available may be given the opportunity to start new banks. Most of these institutions are state financial institutions and are in bad shape. Many would qualify for imminent closure, given they are sustaining on fund-infusion from state governments at regular intervals. Let us also not forget that reputed industrial houses are capable of bailing out their banks in case of shortage of funds.
K V Rao Bangalore
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