7/27/2019 Lincense to Big Comp for Banking

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DEV CHATTERJEE & ABHIJIT LELE

Mumbai, 23 January

Chief executives of leadingcorporate houses, led byBajaj Auto Chairman Rahul

Bajaj, have come out in favour ofgranting banking licences to con-glomerates, saying the ReserveBank of India (RBI) shouldinstead ensure Chinese walls

between group companies andbank applicants, so that banksavoid lending funds to groupcompanies.

However, Deepak Parekh,chairman of HousingDevelopment FinanceCorporation (HDFC), the pro-moter of HDFC Bank, has askedcorporates to stay out of the bank-ing business, citing past experi-ences.

Among Indian conglomer-ates, the Aditya Birla Group, the

Bajaj Group, Mahindra &Mahindra and the Tata Group areamong the top contenders forbanking licences, as these alreadyhave full-fledged non-bankingfinancial companies takingdeposits and lending funds.

Many economists have cau-tioned against giving a bankinglicence to a conglomerate, sayingit would lead to a conflict of inter-est between the bank and groupcompanies. Recently, theInternational Monetary Fund,Nobel laureate Joseph Stiglitz,

chairman of the Prime MinistersEconomic Advisory Council CRangarajan and economist PercyMistry had said India should becautious in giving licences to cor-porates. They cited instances ofglobal banks facing various prob-lems after lending to group com-panies. While Stiglitz said thedangers of conflicts of interestsoutweighed any economy ofscale, former finance ministerYashwant Sinha said giving newbanking licences to corporatehouses would lead to unneces-sary risks in the financial sector.

Rahul Bajaj, chairman of BajajAuto, said, This argument of notgranting licences to corporates isabsolutely misconceived and notin the interest of inclusive growthin India. When people speakabout global companies, theyspeak of banks in the US and UK,such as Citibank, Morgan, Bank ofAmerica and many others, whichwere the cause of the financialmeltdown of September 2008.These were privately-owned

banks but managed by profes-sionals who were greedy for short-term profits.

However, Parekh says con-glomerates should be kept out ofthe banking business. There is achance RBI may give licences toindustry houses that meet the fitand proper criterion. The bank-

ing regulator may also set strictconditions for such banks, mak-ing these weigh the benefitsagainst obligations, he said.

Bajaj says RBI must ensurenew banking licences arent givento corporates/large houses whosetracks records dont suggest pro-bity in public life and ethicalbehaviour. Bharat Doshi, chair-man of Mahindra & MahindraFinancial Services, said it wouldbe folly if banking licences weredenied to corporate houses in thebelief some errant players mightmisuse the licence and divertfunds to companies of that cor-porate house. More than theownership, RBI needs to putgreater emphasis on corporategovernance, transparency, thebusiness model and long-termcommitment. This will ensureorganisations, corporate or oth-erwise, obtaining bankinglicences engage in fair businesspractices and operate within theregulatory framework, as pre-scribed by RBI, said Doshi, also

executive director and groupchief financial officer of Mahindra& Mahindra.

In its draft guidelines, RBI hadalready stated the parameters forindustrial and business houses toset up banks. Safeguards such asthe dilution of promoters stake,limits on group exposure and

strict controlling and reportingguidelines were among therequirements to shield the bankfrom misuse by promoters. Inany case, RBI now has sweepingpowers to penalise those whobypass the safeguards, Doshiadds.

In the draft regulations, RBIhad said groups with exposure tothe real estate sector shouldnt beallowed to get banking licences.As the Tata Group and Mahindra& Mahindra have exposure to realestate, these groups could facehurdles in securing bankinglicences. Doshi says while debat-ing this issue, due emphasisshould be given to the predomi-nant presence and experience ofsome corporate houses in pro-viding financial services in ruralIndia and furthering the agendaof financial inclusion.

The Tata Group did not replyto an email seeking comment.

The Aditya Birla Group says itdoesnt agree there could be aconflict of interest between a

bank and a conglomerate.Santrupt Misra, director of AdityaBirla Management Corporation,says a corporate should haverobust and transparent ways tomanage conflict of interest.

RBI is expected to come outwith the final guidelines for grant-ing banking licences soon.

Banking licences:Corporate honchos ruleout conflict of interestEconomists advise against it, citing international experiences;business leaders say RBI should allow move for inclusive growth

Not granting licencesto corporates isabsolutelymisconceived and notin the interest ofinclusive growth inIndia Many banksin the West have

failed in spite ofprofessionalmanagement. InIndia, promoters willprotect their stake

RAHUL BAJAJChairman, Bajaj Auto

More than ownership,RBI needs to putgreater emphasis oncorporate governance,transparency, businessmodel and long-termcommitment. This willensure thatorganisations thatobtain banking licenceswill engage in fairbusiness practices

BHARAT DOSHI

Chairman, Mahindra FinancialServices

LEARN FROM WESTS FAILURE, LAYSTRESS ON TRANSPARENCY

Licences should not begranted to conglomerates. RBIshould set strict conditions

for banks, making themweigh the benefits againstobligations

DEEPAK PAREKH

Chairman, HDFC

NO TO CONGLOMERATES