Jury is still out: RBI Deputy Guv on entry of big biz groups in banking

“The jury is still out” on the issue of allowing big corporates into the banking space, says M Rajeshwar Rao, Deputy Governor, Reserve Bank of India (RBI).

“Given that banking is a highly leveraged business dealing with public money, it makes sense to keep industry/business and banking separate,” Rao said. This separation is expected to avoid spillover risks, where trouble anywhere in the group entity may result in transferring risks on to the depositors, leading in turn to claims on deposit insurance with subsequent ripple effects cascading across the largely interconnected financial systems, creating concerns around financial stability, he said at the Mint Annual Conclave.

“These issues have been flagged by the IWG (Internal Working Group) also and therefore, it is necessary that we closely examine the related matters before thinking of permitting large industrial houses or NBFCs owned by such houses to set up any new bank.”

On the IWG has recommending that the cap on promoters’ holding in long run be raised to 26 per cent (from existing 15 per cent), Rao said, “we have agreed with the views of the IWG which have tried to strike a balance between the challenges posed by concentration of ownership on the one hand and diffusion of ownership on the other.”