S&P Global Ratings said on Monday a recommendation from the Reserve Bank of India committee to allow industrial conglomerates to set up banks as part of proposed changes to the banking sector, is fraught with risk.
A working group at the Reserve Bank of India (RBI) recommended a series of changes, details of which were made public last week, that include allowing industrial houses to act as so-called bank promoters, meaning they could take a major stake in a lender.
“The working group’s concerns regarding conflict of interest, concentration of economic power, and financial stability in allowing corporates to own banks are potential risks,” S&P Global Ratings said in a note.
Corporate ownership of banks raises the risk of inter-group lending, diversion of funds and reputational exposure, S&P said, adding that contagion risk from corporate defaults would also rise significantly if industrial houses were at the helm of a bank.
Last week, government placed a private lender under moratorium for a month due to a “serious deterioration” in its finances.
Non-performing assets (NPA) within the corporate sector remain elevated even though they came down from 18 per cent in March 2018 to 13 per cent in March 2020, said S&P.
A former RBI governor, Raghuram Rajan, and a former deputy governor, Viral Acharya, also criticised the proposal, calling it a “bad” idea.
“It will further exacerbate the concentration of economic (and political) power in certain business houses,” they said in a LinkedIn note published on Monday.
Even though government needed more banks it was not wise to allow industrial houses into banking as the history of such inter-connected lending showed it could be disastrous, they said.
The panel’s recommendations included allowing shadow banks to convert into lenders, which could improve financial stability, the ratings agency said.
The central bank has invited comments on the committee’s report, which can be submitted until January 15, 2021.