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Current Affairs

Corporates as banks

Date: 26 November 2020 Tags: Miscellaneous

Issue

A report by Internal Working Group of RBI has recommended large corporate houses to be promoters of banks in India.

 

Background

The banking system of India was nationalised to prevent concentration of vital economic resources in hands of the few rich individuals.

 

Details

  • After the economic liberalisation, the economy’s credit needs grew and private banks re-entered the picture.

  • Even after rapid growth, India’s balance sheet constitutes less than 70% of the GDP, which is less than peers such as China.

  • Domestic bank credit to privates sector is just 50% of GDP whereas in economies such as China, Japan, and South Korea it is above 150%.

  • India needs to boost its banking system to register rapid growth. For that to take place, private banks have to grow.

  • Private banks are not only more efficient and profitable but also has more risk appetite.

 

Reasons for criticism

  • The main concern is allowing corporate houses to open their own banks is a conflict of interest as it leads to connected lending.

  • Unlike non-banking groups or NBFCs, a private bank accepts deposits from public. There is a possibility that they channelize public money for their own ventures.

 

Reasons for promoting private banking

  • Indian economy needs more money to grow. The government-owned banks are struggling to survive due to NPAs.

  • Growth is falling and revenues diminishing. The government has limited ability to push for growth through public sector banks.

  • Large corporate with deep pockets have the ability to fund India’s future growth as they have finances as well as technology to develop.

 

Connected lending

Connected lending refers to situation where the promoter of the bank is also a borrower and it is possible that promoter can channelize depositors’ money into their own ventures.