Banks and Business Houses

 RBI seems to be considering permitting NBFCs and large corporate / industrial houses to promote new commercial banks. This has been described as a 'bombshell' by Raghuram Rajan and Viral Acharya. They argue that such houses are themselves big borrowers and we cannot expect them to choose good borrowers and therefore credit quality of banks would suffer.

This criticism is debatable and is one-sided. Though it is fashionable to condemn large industrial houses as purveyors of corruption and spewers of malpractices, facts do not bear this out. Fourteen banks were nationalised in the year 1969. Prior to this, many of these had been promoted by industrial groups. Central Bank of India, UCO Bank, Indian Bank and Indian Overseas Bank had industrial houses as their promoters. They were doing well; therefore, the government did not have any problem in managing them. They became sloppy and corrupt subsequently because of political interference.

The private banks which went under had been promoted by 'eminent bankers'. Global Trust Bank (Trust was an oxymoron here) and Yes Bank (Yes for mismanagement?) were the babies of Ramesh Gelli and Rana Kapoor, both banking doyens. They got banking licences because they were professionals and not industrial / business magnates. They taught industrialists how to be corrupt!

Thus there are examples to show that the problem is not with industrial houses. It lies elsewhere. If potential promoters are not subjected to strict due diligence, whoever they are, banking mishaps will happen. Industrialists at least know the difficulties faced by businesses and as bankers they will not be indifferent to customers. To dismiss them as fraudulent as a group is a sign of unpolluted prejudice.

RBI's former Governor and Deputy Governor could have proposed better due diligence before sanctioning licences to open banks. Unfortunately they have chosen to mouth populist condemnation of businessmen and industrialists. This goes to show that what is ailing us is a closed mind. Any attempt to open it will spontaneously evoke cynicism and contempt.