Saturday, September 3, 2011

should industrial houses get banking licenses?

  • Arguments against giving licence to industrial/business houses:
    1. connected lending
    2. opportunities for regulatory arbitrage.
    3. exacerbate the concentration of economic power and political influence
    4. existing players also could raise the required capital and, as such, no additional benefit accrues by granting bank licences to industrial houses.
  • Arguments in favour of giving licence to industrial/business houses:
    1. Financial inclusion requires higher scale of operations which the industries would be able to bring
    2. their talent could be gainfully harnessed in the banking sector.
    3. industrial houses could bring to banking strong governance practices, management expertise, talent, innovation and global best practices especially in customer service,
  • Safeguards for allowing industrial/business houses to promote new banks:
    1. they should not be allowed to have their own banking operations through the bank they have promoted.
    2. should be issued only a retail banking license for first 5 years. Subsequently, commercial banking should be allowed with restrictions
    3.  strong regulation relating to connected lending, mutual lending to each other’s sponsor groups, ring fencing of the activities,

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