Banking on RBI PDF Print E-mail
Wednesday, 31 August 2011 00:00
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A decade after the banking licence guidelines prohibited industrial houses from setting up new banks, industrial houses look all set to get new banking licences. Despite all past evidence of how industrial houses owning banks creates all manner of problems—RBI’s discussion paper last August referred to the Japanese problems with keiretsus, Korea’s with chaebols and India’s in the pre-nationalisation phase when different banks were linked with individual business groups—RBI is confident it has the problem licked. This could partly be due to the fact that the banking industry is already well-developed, so the problem of other borrowers getting squeezed out is likely to be less severe. Two, RBI has insisted on a different corporate holding structure and has laid down strict group exposure norms on lending. Three, RBI wants the Banking Regulation Act to be amended—to be, for instance, allowed to supersede bank Boards—before any licences are issued. As an aside, the holding company (Holdco) concept for financial services will have to be brought into legislation with the proviso that all operations of the Holdco, not just the banking ones, will be regulated only by RBI.

Beyond this, however, is a leap of faith and a lot depends on how RBI ups its supervisory game—as RBI said in the discussion paper, it is very difficult to detect rotation of funds by corporate houses on a 24x7 basis. The fact that the government allows multiple layers of subsidiaries creates huge problems and makes it near impossible to know which company belongs to whom. Indeed, a big setback to the investigations in the 2G scam is the fact that there is still no definition of what an ‘associate’ company is—even the proposed definition, FE pointed out in its editorial on August 23 (http://www.financialexpress.com/news/fe-editorial-associates-vs-owners/835594/), leaves enough loopholes. RBI has tried to fix this by saying its decision will be final on whether a company is linked, but it leaves the question of 24x7 monitoring unanswered. Despite all evidence to the contrary, RBI places touching faith in independent directors—at least half the directors on the Holdco have to be independent—to ensure promoters run the bank properly. There are enough scams, Satyam being the most recent among the high-profile ones, to show the independent directors policy (Clause 49) has not delivered. Similarly, while doing background checks with CBI, Sebi etc is important, RBI has to keep in mind the practice of compounding of offences and consent orders—once the penalty is paid, the slate is wiped clean! RBI and the government’s immediate problem, however, is going to be different. Since there is no previously laid out criterion for deciding who is ‘fit and proper’, nor for what makes, say, L&T a better bet than the Tata Group, the process of giving licences is certain to be quite contentious.


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