The established Internal Working Group of the Reserve Bank of India provides permit to corporates into banking. This allows large NBFCs to convert into banks which could have implications for a wide range of entities. Brokerages believe that while it may take time for corporate-promoted banks to be set up, some of the other proposals could take effect relatively sooner.
In a capital-starved economy like India, RBI’s working group feels that allowing corporate to promote banks can be an important source of capital. These corporates are capable of adding attributes like “management expertise, experience, and strategic direction to banking”. The group also noted that internationally, “there are very few jurisdictions which explicitly disallow large corporate houses”. One of the major reason behind RBI’s age old disagreement for corporate intrusion in the banking sector was the matter of ‘Conflict Of Interest.’
” The corporate governance in Indian companies isn’t up to international standards and “it will be difficult to ring-fence the non-financial activities of the promoters,” according to an expert. There will also be a risk of promoters giving loans to selves. Before the bank nationalization happened in 1969, some of the private banks were owned by large corporates and these big industrialists used to give loans to themselves.
“Internal procedures… vest large discretionary powers in the boards of directors who have often acted as sources of patronage in deciding credit matters.” V.A. Pai Panandiker, an advisor in finance ministry, wrote in August 1967. A survey also revealed that 188 individuals served as directors on boards of 20 leading banks held 1,452 directorships of other firms.
In March 2018, the domestic bad loans of Indian banks peaked at ₹9.62 trillion. Of this, around 73.2% or ₹7.04 trillion, were defaults made by the industry.