Saturday, June 29, 2013

Should industrial houses be given bank licenses?

Well, not in the first round at least. But not for the reasons that is often cited: the danger of inter-connected lending, that is, banks floated by industrial houses lending to companies within the group. This, critics, say could sink the banks if something goes wrong with the group.

I happen to think otherwise. I doubt that the reputed industrial houses would let banks floated by them sink: they have too much at stake. They will go all out to make a success of their banking ventures. However, while their banks will prosper, this will come at the expense of existing players, mainly public sector banks (PSBs). Does this matter? Yes, because it will create systemic risk in India banking. PSBs are in the forefront of financing infrastructure and agriculture, areas that badly need credit. Private banks, including those set up by industrial houses, will focus on a narrow set of corporates and high net worth individuals. This does little for the cause of financial inclusion.

More in article in Indian Express, Banking on inclusion.

No comments: