Corporate as a Bank: prospect, Issue and challenges

 Internal Working Group(IWG) of RBI in a report recommended large corporate and Industrial house allowed ownership of private bank. IWG has been constituted by RBI to review ownership guideline and corporate structure for Indian private Bank.

What are the prospect of allowing Corporate in Banking sector?

• Indian Banking sector is struggling to meet the credit demand of growing Economy. for eg-       a) The total balance sheet of banks in India is less than 70% of GDP even after three decades of rapid growth in India which is much less than other countries like China where it is 150%.            b)The domestic Bank credit to private sector is around 50% of GDP which is much less than other countries like USA, CHINA, S.KOREA where it is more than 150% of GDP.
• Indian banks are less cost efficient as compared to global peers because of high NPA and interest rate in the economy.
• Covid19 has already cut government hand in providing capital to public sector bank. Hence corporate with big resources can provide much needed capital to economy.
• Indian Economy require big banks with large capital to become $5Tn Economy. top5 bank in world belong to china.

     What are the issue ?

• Critics argued that it may lead to connected lending(connected lending in simple language is that the promoter of bank is also borrower of bank).
• Expert argued that it may lead to consolidation of political and economic power in the hand of corporates. Hence the power equation in society change.
• There is also of fear of Corporates in banking may lead to financial crisis because of there thrust to make profit for eg. 2008 crisis.

Its a tough choice to make considering its positive and negatives but if RBI decided to go ahead with the plan then it must put necessary safeguard in place.