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Approval of Big Traders to Open Bank ‘Bad Idea’: Rajan

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Former Reserve Bank of India (RBI) Governor Raghuram Rajan and former Deputy Governor Viral Acharya have scrutinised the recommendation to allow Indian corporate houses to set up banks. 

He has said that the proposal to allow corporate organisations to set up banks is unusual in today’s condition. He has called this suggestion a ‘bad design’. This recommendation was given by the Internal Working Group (IWG) of Reserve Bank of India (RBI) recently.

  • Insights on allowing these people to open banks – An internal group of Reserve Bank of India (RBI) made several recommendations on Friday last week regarding new rules on the ownership of private banks.
  • These recommendations advocate the granting of banking licenses to non-banking financial institutions (NBFCs), which have assets of more than Rs 50000 crore and have a track record of at least 10 years, as well as large industrial houses to run banks.
  • Can be allowed. With the recommendations of the Reserve Bank committee, the debate has also started.

Questioning the timing of the recommendation as well- He questioned the timing of the proposal and said that India is still trying to take lessons from the failures of IL&FS and Yes Bank. Rajan said that many characters of the IWG are acceptable. However, he said that his main recommendation to give entry to Indian business houses in the banking sector should be put on hold.

  1. Why the need for a sudden change in the statute – Former RBI officials raised the question that what was the need for a sudden change in the regulation.
  2. After all, a committee is rarely formed without any prior thought. Has there been such a big change in thinking, towards which the committee is responding? 
  3. Regulation and supervision would be strengthened only by enactment of a law, then NPA would not be a problem.

Deputy Governor Viral Acharya criticised the recommendation to allow corporate houses to set up banks. Both say that in today’s situation this decision is shocking and a bad idea. Rajan and Acharya said in a joint article that it is better to leave this proposal now.

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