Raghuram Rajan and Viral Acharya on Monday criticised RBI Internal Working Group's recommendation to allow Indian corporate houses to set up banks as part of proposed changes to the banking sector.
Raghuram Rajan, a former RBI governor, and Viral Acharya, a former RBI deputy governor, said the proposal is a "bad idea".
"It will further exacerbate the concentration of economic (and political) power in certain business houses," they said about the IWG proposal in a note published on Monday on LinkedIn.
Rajan is currently Katherine Dusak Miller Distinguished Service Professor of Finance at The University of Chicago Booth School of Business and Acharya is a professor at the Stern School.
They questioned the timing of the propoal at at time when "India is still trying to learn the lessons from failures like IL&FS & Yes Bank".
"Many technical rationalisations proposed by RBI's Internal Working Group are worth adopting, while its main recommendation, to allow Indian corporate houses into banking, is best left on the shelf," argued Rajan .
They also questioned the urgency to change regulation, especially given that committees are rarely set up out of the blue.
"Why is there urgency to change the regulation? After all, committee are rarely set up out of the blue. Is there some dramatic change in perception that it is responding to?" ask the former RBI officials.
"If sound regulation and supervision were only a matter of legislation, India would not have an NPA problem," they said.
The former RBI officials also said, "India has seen number of promoters who passed fit & proper test at the time of licensing but then turned rogue."
Last week, an RBI panel had proposed that large corporates may be permitted to promote banks, as well as raising the cap on promoters' stake in private sector banks to 26 per cent, from15 per cent at present.
The RBI panel has recommended that corporates should be allowed to control banks after necessary amendments to the Banking Regulation Act, 1949 to prevent connected lending and exposures between the banks and other financial and nonfinancial group entities.
The RBI proposes that only well-managed NBFCs with over 10 years of experience and ₹50,000 crore of assets will be allowed to convert to a bank.
S&P Global Ratings, on Monday, also expressed scepticism over allowing corporate ownership in banks given India's weak corporate governance amid large corporate defaults over the past few years.
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November 23, 2020 at 05:49PM
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