Governor Shaktikanta Das announced on Friday that the Reserve Bank of India (RBI) currently has no plans to permit business houses to establish banks. Speaking at a Financial Express event, Das highlighted the risks of conflicts of interest and related-party transactions that such permissions could entail.
“There is no consideration at this point to allow business houses to promote banks,” Das confirmed in response to a query. Historically, the RBI has disqualified numerous conglomerates from starting banks, notably during the last round of licensing nearly a decade ago.
The topic resurfaced in 2020 when an RBI working group suggested that corporate involvement could bring in much-needed capital to support India's growth objectives. However, Das highlighted the unique nature of banking compared to other businesses, pointing to global experiences of conflict and regulation challenges when business houses are involved in banking.
Reflecting on India's history, Das mentioned the pre-nationalisation era of the late 1960s, when business houses were involved in banking, leading to significant regulatory difficulties.
"Global experience shows that monitoring and regulating related-party transactions is extremely challenging, with high associated risks," Das remarked. He stressed that while economic growth requires resources, increasing the number of banks is not the solution. Instead, India needs "sound, healthy, and well-governed banks" capable of leveraging technology to mobilise savings and meet credit demands.
Das also noted that the RBI has made the licensing process for universal banks an ongoing one, encouraging applications. He highlighted the rapid growth of the private credit space as an attractive investment for those with a high-risk appetite but warned of the potential financial stability concerns due to vulnerabilities and interconnectedness in these markets.
"Currently, risks seem contained, but it's crucial to be mindful of the potential for amplified negative shocks," Das added.
Das said the RBI's relations with the government have been "smooth" during his nearly six-year term, and credited the close coordination between the two for the quick revival of the economy after the pandemic. "I am saying from my experience. Nobody expects RBI to be a cheerleader. I have had no such experience," he said, responding to a specific question about a lament made by one of his predecessors in a recent book.
Asked if he is open for a new term at Mint Road, Das said he is very focused on the current assignment and does not think of anything outside that.
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