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Bank licences to corporates a ‘bad idea: Raghuram Rajan

Days after an Internal Working Group (IWG) of Reserve Bank of India’s (RBI) recommended allowing large Indian corporates to enter the banking sector, former RBI Governor Raghuram Rajan and Deputy Governor Viral Acharya have hit back at the suggestion and questioned the timing for it.

Terming the recommendation as a “bombshell”, in a blog post, they said that although several recommendations of the report are worth adopting the one to allow corporate houses into banking should not be taken up.

“To the contrary, it is even more important today to stick to the tried and tested limits on corporate involvement in banking,” said the article. Sharing the article on LinkedIn, Rajan said that he thinks the proposal is a “bad idea”.

It said that there are two primary rationales for not allowing corporates into banking, the first being that industrial houses can easily get financing, with no questions asked, in case they have an in-house bank.

“The history of such connected lending is invariably disastrous – how can the bank make good loans when it is owned by the borrower?”

Further, both economists also noted that regulations can succumb to either political pressure or the urgency of the moment.

Observing that a regulator has to discriminate between “fit and proper businesses” and shady ones only when it is “truly independent” which may always not be the case.

“Why is there an urgency to change the regulation? After all, committees are rarely set up out of the blue,” said the article.

Questioning the timing of the proposal, Rajan and Acharya said: “Why now, at a time when we are still trying to learn the lessons from failures like IL&FS and Yes Bank?”

The proposal has created ripples and drawn criticism from several experts and analysts although the industry has applauded the recommendation.

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