Large corporate should be allowed ownership of private banks: RBI

The Internal Working Group (IWG) of RBI was constituted to “review extant ownership guidelines and corporate structure for Indian private sector banks” has submitted its report recently.A recent recommendation by the Reserve Bank of India (RBI), allowing large corporate or industrial houses to be promoters of private banks has raised a lot of concern.

Background

• The banking system in any country is of critical importance for sustaining economic growth.
• India’s banking system had changed a lot since Independence when banks were owned by the private sector, resulting in a “large concentration of resources in the hands of a few business families”.To achieve a wider spread of bank credit, prevent its misuse, direct a larger volume of credit flow to priority sectors and to make it an effective instrument of economic development, the government resorted to the nationalisation of banks in 1969 (14 banks) and again in 1980 (6 banks).
• With economic liberalisation in the early 1990s, the economy’s credit needs grew, and private banks re-entered the picture.

Need for constituting IWG:

Poor coverage

• However, even after three decades of rapid growth, the total balance sheet of banks in India still constitutes less than 70 per cent of the GDP (much less compared to China (175%)).

Inadequate credit to private players

• The domestic bank credit to the private sector is just 50% of GDP when in economies such as China, Japan, the US, and Korea, it is upwards of 150 per cent.
• In other words, India’s banking system has been struggling to meet the credit demands of a growing economy.
• There is only one Indian bank in the top 100 banks globally by size.
• Further, Indian banks are also one of the least cost-efficient.