So, what's the big deal if industrial houses own banks?

It is strange logic that disqualifies industrial houses but which thinks stock brokers make good bankers

Industrial houses who were hoping for a banking licence may be in for a shock as a Business Standard report says that Reserve Bank of India (RBI) is unlikely to oblige them. The report says that RBI has received widespread opposition from several quarters including economists, institutions, a former RBI governor and IMF.

Even a parliamentary panel headed by BJP leader Yashwant Sinha had suggested to the RBI in December 2013, that they refrain from granting bank licences to corporates.

It is strange logic indeed that says industrial houses are ineligible for a banking licence but which thinks stock brokers make good bankers.

A survey conducted by Ficci found out that 69 per cent of its respondents felt that industrial houses should be allowed to operate as banks. Nearly 57 per cent of these respondents were from banking and non-banking finance companies (NBFCs).

Is it misplaced fear or excessive caution that is preventing RBI from issuing licences to industrial houses? Let's look at some of the issues raised against licences for corporate houses.

The parliamentary panel report says that "Banking being a highly leverage business involving public money and public welfare, the committee are of the considered opinion that it will be more in the fitness of things to keep industry and banking separate."

When corporate houses are allowed to open NBFC's and raise deposit from public, they are also operating in a highly leveraged business. No one seem to have any problem with the NBFC structure, so why this unnecessary show of caution.

As for the public money argument, firstly RBI has enough checks and balances in place through its CRR and SLR deposits which can prevent deposits of individuals. Secondly, most of the advances are generally secured in nature which can be sold off in case there is an issue with the deposits.

The parliamentary panel has expressed apprehension that management of private banks may deploy their funds to extend undue favour to own industrial owners, as it was noticed in pre-nationalised era. Agreed there were issues in earlier years, but technological developments and stricter guidelines can help prevent such an incident. Use of software and ratings has helped prevent banks lending money to companies who tapped multiple banks for same loan. Nothing prevents RBI to bring in stricter norms of lending to parent companies. A strong and independent board of directors for such corporate banks with nominees from RBI can also help prevent divergence of funds.

Another fear pointed out by observers is that tax payer money would be used to bailout banks set up by corporates. Firstly, bailout using tax payer money is applicable for all banks and secondly in any case banks are using depositors money and government is pumping in tax payer money by capitalisation for PSU banks who are writing off their non-performing assets (NPAs).

Over the last few years rising NPAs have demonstrated that neither banks nor rating agencies are capable of understanding the dynamics of industrial sector. Most of the  bigger and well managed corporate houses in turn have been smart enough to preserve their cash. It is this knowledge of the sector and the economy that they bring to the table, which can add a lot of value to the banking sector.

It has been reported that USA too does not allow industrial houses. But in the US the banking industry lobby which is one of the strongest in the world, has prevented their entry.

In India, banking is still at a nascent stage as compared to the developed world. Restricting banking to only those players who have a finance background will slow the growth of the industry.

Strangely there are no restrictions from either the parliamentarians or economists or institutes when it comes to regulate co-operative banks. A number of politician are owners of such banks which have their roots in rural India.