Bank licences to corporates ‘bad idea’: Raghuram Rajan

Bank licences to corporates 'bad idea': Raghuram Rajan

Days after an Internal Working Group (IWG) of Reserve Bank of India’s (RBI) recommended allowing large Indian corporates to enter the banking sector, former RBI Governor Raghuram Rajan and Deputy Governor Viral Acharya have hit back at the suggestion and questioned the timing for it.

Terming the recommendation as a “bombshell”, in a blogpost, they said that although several recommendations of the report are worth adopting the one to allow corporate houses into banking should not be taken up.

“To the contrary, it is even more important today to stick to the tried and tested limits on corporate involvement in banking,” said the article.

Sharing the article on LinkedIn, Rajan said that he thinks the proposal as a “bad idea”.

It said that there are two primary rationales for not allowing corporates into banking, first being that industrial houses can easily get financing, with no questions asked, in case they have an in-house bank.

“The history of such connected lending is invariably disastrous – how can the bank make good loans when it is owned by the borrower?”

Further, both the economists also noted that regulatory can succumbed to either political pressure or the urgency of the moment.

Observing that a regulator has to discriminate between “fit and proper businesses” and shady ones only when it is “truly independent” which may always not be the case.

“Why is there urgency to change the regulation? After all, committees are rarely set up out of the blue,” said the article.

Questioning the timing of the proposal, Rajan and Acharya said: “Why now, at a time when we are still trying to learn the lessons from failures like IL&FS and Yes Bank?”

The proposal has created ripples and drawn criticsm from several experts and analysts although industry has applauded the recommendation.

Keep scrolling to read more news

Catch up on all the latest Crime, National, International and Hatke news here. Also download the new mid-day Android and iOS apps to get latest updates.

Mid-Day is now on Telegram. Click here to join our channel (@middayinfomedialtd) and stay updated with the latest news

This story has been sourced from a third party syndicated feed, agencies. Mid-day accepts no responsibility or liability for its dependability, trustworthiness, reliability and data of the text. Mid-day management/mid-day.com reserves the sole right to alter, delete or remove (without notice) the content in its absolute discretion for any reason whatsoever

This article is auto-generated by Algorithm Source: www.mid-day.com

Report

RELATED:  HDFC online and mobile banking outage: don’t rely on one bank