The Reserve Bank of India (RBI) hinted at possible granting of bank licences to corporate sector players, but not before strengthening the rules to prevent self-lending by such groups. RBI also proposed bifurcation of the post of chairman and managing director (CMD) in public sector banks as part of improving corporate governance. "As much as these prescriptions (prevention of self-lending) are extensive, there are still gaps. For instance, if a corporate has an interest in a bank as a promoter or a shareholder, but has no position on the board, then there is no prohibition on the bank lending to the corporate.
This opens up opportunities for self-dealing," said D. Subbarao, governor, RBI, while inaugurating a banking conference organised by the Federation of Indian Chambers of Commerce and Industry (Ficci) and the Indian Banks' Association (IBA).
"As we contemplate allowing corporates to promote banks, there is need for changes in statutes and regulations to address these concerns," Subbarao added. There are both statutory and regulatory checks against selfdealing, including prohibition on banks from lending to directors on the board and to entities in which they are interested, through the Banking Regulation Act. But it is not easy for supervisors to prevent or detect self-dealing because banks can hide related party lending behind complex company structures or through lending to suppliers of the promoters and their group companies.
Several corporate groups, including Tatas, Aditya Birla group, Anil Ambani group, Bajaj group, Mahindra group and Larsen & Toubro group are in the race for bank licences. "We have sent a draft amendment to the Banking Regulation Act to the government and the government is working on it. So amendments to the Act are necessary before we contemplate corporates coming into the banking sector," Subbarao said later. RBI had last issued new banking licenses in 2002 to two private banks - Kotak Mahindra Bank and Yes Bank.
On bifurcation of the post of CMD in PSU banks, Subbarao said, "Given our own positive experience, as well as the global endorsement for this position, we will discuss this issue with the government."
However, he said that the success of this proposal lies in laying down and strictly enforcing eligibility criteria for the appointment of chairmen to PSU banks. Though the A.S. Ganguly committee has recommended bifurcation of this position in 2004-05 for all the banks, such a move was allowed to be implemented only in private sector banks in 2007. "Experience shows that this arrangement has worked well," Subbarao said.
Courtesy: Mail Today