HomeNationalBanks: Governance, not ownership, is key

    Banks: Governance, not ownership, is key

    One sentence from a recent internal committee report of Reserve Bank of India — “large corporate/industrial houses may be allowed as promoters of banks” — has generated an intense debate. To put it a little simplistically, those in favour of the suggestion argue that this will bring much-needed capital and competition while those against it claim this will lead to promoters lending bank funds to themselves and create further problems for the ailing Indian banking industry.

    India’s banking history explains this divided response, with many episodes of industry-promoted banks lending to themselves. One major reason for India’s bank nationalisation in 1969 was industry’s control over banks. The then Prime Minister Indira Gandhi listed “the removal of control by a few” as one of the major reasons for nationalisation. She further added that by “severing the link between the major banks and the bigger industrial groups which have so far controlled them”, the government will be able to professionalise the banking sector. Ever since then, we have been uncomfortable with corporates owning banks.

    However, history is also replete with banks promoted by professionals lending irresponsibly to bring ruin. Let us review private bank licences since 1994. We choose 1994 since after bank nationalisation, no new private banks were licensed and new private banks were allowed only post-1991 reforms. Fourteen new banks have been licensed in three stages since 1990s. Of the 14, financial institutions and professionals have promoted five banks each. Two banks were promoted by corporates and two others were set up with the conversion of non-banking financial company (NBFC) and Cooperative Bank. RBI has clearly preferred professionals and institutions for new banks.

    Of the 14 banks, four have been merged and two were in financial trouble but were bailed out by financial institutions. Amid the banks which have avoided trouble, those promoted by financial institutions have been stable. Out of the six failed/merged/troubled banks, four were run by professionals, one by a financial institution and one by a corporate. Clearly, professionals have not fared on expected lines.

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