RBI-FM agree to keep corporates out of banking

The Reserve Bank of India (RBI) and the finance ministry have agreed to keep corporates out of the banking business. Share prices of bank licence aspirants like SREI and Indiabulls Financial Services reacted and fell amidst a broader positive trend in the stock market. “The ministry and RBI have come to an understanding that big corporate houses ought not to be allowed to enter the banking business at this juncture,” said a report in The Financial Express. The central bank has highlighted the risk to the integrity of the banking system from other business interests of corporate houses. This is, in effect, a rap for corporates as they have not maintained high corporate governance standards. It appears that the central bank is not convinced that the so-called promoters of businesses would keep an arm’s length from the money in the banking system. The corporate governance issues involved in managing business have often been highlighted in the past. The independence of corporate boards is critical to ensure that the interests of not just promoters but also of minority shareholders are protected. The banking system has the additional burden of protecting the integrity of the financial system. Any collapse in the banking system due to poor governance could spread like a contagion. At the same time, RBI also needs to focus on the financial inclusion agenda. It needs to take banking to remote parts of the country. There are a few things that the RBI needs to take action on quickly. It needs to allow non-banking finance companies to convert themselves into banks if they have a good financial management record. RBI could also clarify the stance on foreign ownership in banks. At the same time, the central bank should not shun corporate houses that follow high standards of corporate governance. New banks promoted by industry houses could have majority independent directors on boards and a professional management. RBI has the responsibility to ensure compliance. Corporate houses need to pull up their socks and show that they are willing to delegate power to boards of individual companies that have more independent directors than family members. The central bank would keenly watch how companies work towards making their boards powerful and independent. Corporate houses that step back and allow their company boards to function independently in a consistent manner would find favour. For now, it appears that regulators are convinced that makers of cars, engineering and other companies are good in their businesses but not good enough to run a bank.

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