DMPQ-Critically evaluate the RBI”s recommendations to allow corporate sector to own banking institutions.

  1. The recommendation of an internal working group of the Reserve Bank of India (RBI) to allow industrial houses to promote commercial banks has stirred up stiff opposition all around. This is not surprising as even the working group acknowledges that almost all experts they consulted, except one, were against it. But the opening up of the banking sector to the corporate sector has been a work in progress for almost a decade now. The late Pranab Mukherjee, in his budget speech, spoke about the need for giving additional banking licences to more aspirants, including non-banking financial companies. The RBI followed this up with a discussion paper listing out, among various other matters, the pros and cons of allowing industrial houses to promote banks either on their own or by allowing some major financial sector players to promote banks, or even by facilitating their takeover of regional rural banks as an intermediate step before letting them set up banks.

However, the final licencing guidelines issued in 2013 effectively stymied this move by clearly stating that private and public sector entities and non-banking financial companies will be eligible to set up a bank only if they pass the fit and proper test of the central bank, have a past record of sound credentials and integrity and are financially sound with a successful track record of running their business for at least 10 years. This felled the licence aspirations of many large industrial groups. Now, the internal working group has, hurriedly, in less than five months, gone a step further and recommended the entry of industrial groups, as in the pre-bank-nationalisation era, after making necessary amendments to the Banking Regulations Act, 1949.

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