Raghuram Rajan says proposal to allow business houses into banking is a 'bad idea' -J Jagannath
The former RBI governor, and Viral Acharya, a former RBI deputy governor questioned timing of the RBI panel's proposal at a time when 'India is still trying to learn the lessons from failures like IL&FS & Yes Bank'
New Delhi: Raghuram Rajan and Viral Acharya on Monday criticised RBI Internal Working Group's recommendation to allow Indian corporate houses to set up banks as part of proposed changes to the banking sector.
Raghuram Rajan, a former RBI governor, and Viral Acharya, a former RBI deputy governor, said the proposal is a "bad idea".
"It will further exacerbate the concentration of economic (and political) power in certain business houses," they said about the IWG proposal in a note published on Monday on LinkedIn.
Rajan is currently Katherine Dusak Miller Distinguished Service Professor of Finance at The University of Chicago Booth School of Business and Acharya is a professor at the Stern School.
They questioned the timing of the propoal at at time when "India is still trying to learn the lessons from failures like IL&FS & Yes Bank".
"Many technical rationalisations proposed by RBI's Internal Working Group are worth adopting, while its main recommendation, to allow Indian corporate houses into banking, is best left on the shelf," argued Rajan .
"The history of... connected lending is invariably disastrous -- how can the bank make good loans when it is owned by the borrower? Even an independent committed regulator, with all the information in the world, finds it difficult to be in every nook and corner of the financial system to stop poor lending," they said.
Referring to the group's proposal to allow Indian corporate houses into banking, the article said, "its most important recommendation, couched amidst a number of largely technical regulatory rationalisations, is a bombshell".
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Livemint.com, 23 November, 2020, https://www.livemint.com/industry/banking/raghuram-rajan-says-proposal-to-allow-business-houses-into-banking-is-a-bad-idea-11606126573623.html