Raghuram Rajan & Viral Acharya criticize RBI’s move to allow corporates in banking

The new policy made by the Internal Working Group of RBI to allow corporates in banking is tagged as ‘bombshell’ by former Reserve Bank Of India governor Raghuram Rajan and deputy governor Viral Acharya. Both the experts strongly criticized the proposal to open up bank licences for corporates. Even other central bankers and S&P Global ratings cautioned against the move stating that it is fraught with risks.

Out of five, one member from the Internal Working Group were against the idea of corporate/industrial houses promoting banks. The group had no issues in corporate-owned financial houses turning into banks but on the contrary, the group had opposed corporate promoters as prevailing corporate governance culture in corporate houses is not up to the international standard.


Both the experts have questioned the timing of the move stating that nothing has changed to warrant a change in the stance of the RBI to deny bank licenses to corporate houses. They also cited the Yes Bank crisis as a limitation of the central bank to gather information on loans.

Former Governor and Deputy Governor expressed in a note that “How can a bank make good loans when it is owned by the borrower? Even an independent committed regulator, with all the information in the world, finds it difficult to be in every nook and corner of the financial system to stop poor lending. Information on loan performances is rarely timely or accurate.” If sound regulation and supervision could be addressed through legislation, India would not be having the bad loan problem that it is facing today, they added.

The former central bankers also said that allowing corporates into banking to increase the bidders for public sector banks was a bad idea.

“It would be a mistake, as we have said in an earlier paper, to sell a public sector bank to an untested industrial house. Far better to professionalize public sector bank governance, and sell stakes to the broader public,” they pointed out.

The proposed policy for allowing corporates to enter banking, through the small finance bank route is also criticized by Rajan and Acharya, “A second possibility is that an industrial house holding a payment bank license wants to transform into a bank. One recommendation of the IWG that is equally hard to understand is to shorten the time for such transformation from five to three years, so perhaps the surprising recommendations have to be read together.”