Corporate entry into banking is a bad idea: Raghuram Rajan, Viral Acharya

Former governor of the Reserve Bank of India (RBI), Raghuram Rajan and deputy governor of the RBI, Viral Acharya have said that the proposals put out by the RBI’s internal working group to allow corporate entry into banking is a "bad idea."

The Central Bank recently released a report by its internal working group that suggested the licencing policy of private banks including proposals of allowing corporates entry to banking sector, permitting promoters to hold on to larger stakes in banking companies, and granting approval to allow well established and experienced NBFCs to convert into banks.

Both Rajan and Acharya criticised the recommendation to allow corporate houses in the banking sector marking out two rationales to support their arguments:

First, corporate houses can avail finance (credit) easily with no questions asked if they have an in-house bank. They explained that the history of such "connected lending is invariably disastrous."

Second, they also contended that the corporate entry into banking sector will further "exacerbate the concentration of economic (and political) power in certain business houses."

Both Rajan and Acharya have cautioned that even if the RBI allots the banking licenses fairly, it will allow undue advantage to large business houses that already have the initial capital that has to be put up.