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Tags Current Affairs

Entry of big business in banking kept on hold

Date: 30 November 2021 Tags: Monetary Policy & RBI

Issue

The proposal of granting banking license to big corporate houses has been kept pending by the Reserve Bank of India (RBI).

 

Background

There is a fear of connected lending and self-dealing if big corporate houses start promoting their own banks.

 

Details

The biggest benefit of corporate entry in banking is that they bring in capital, business experience and managerial competence to the sector.

 

Concerns flagged

  • It is difficult to detect lending to suppliers of promoters and their group companies. This is due to the complex route of shell companies and subsidiaries.

  • These loans have the capacity to become bad loans or assets. The political connectivity of corporate houses makes it difficult to prosecute.

 

Connected lending

  • It is a form of malpractice in which the owner or promoter of a bank giving loans to himself or his related parties.

  • Companies can treat the bank as their private pool of readily available funds. This can further increase the NPAs.

 

Opposition

Many former RBI governors have questioned the validity of move citing conflict of interest. It will be impossible to make good loans if the borrower is the owner.

 

Participation

  • The rules of the central bank say that individuals or corporate entities can participate in the equity of a new private sector bank up to 10 per cent.

  • In addition, the shareholder should not have any Director on the board of the bank based on their shareholder agreement.

  • The RBI classifies a large industrial house as an entity with assets of Rs 5,000 crore or more with the non-financial business accounting for 40 per cent or more of total assets.

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