New Delhi: The RBI working group’s proposal to allow corporate houses to set up banks is a ‘good-looking’ step in a ‘bad direction’ and may lead to crony capitalism and eventual financial instability, former chief economist of World Bank Kaushik Basu said on Thursday.
Basu further said that there is a good reason why all successful economies have a clear dividing line between industries and corporations on the one hand, and banks and lending organizations on the other.
“The proposal from the recently set up Internal Working Group of the Reserve Bank of India, allowing Indian corporate houses to own and run banks is a good-looking step in a bad direction,” he told .
Basu, who was also chief economic adviser during the UPA period, said at first sight, this may look good because the close connection between industrial corporations wanting to borrow and banks wanting to lend speeds up lending activities and makes the banking sector look more efficient.
“But such connected lending is almost invariably a step towards crony capitalism, where a few big corporations capture the business space in the country, slowly edging out the smaller players.
“Also, connected lending can lead to eventual financial instability,” he argued.
Last week, an Internal Working Group (IWG) set up by the Reserve Bank of India (RBI) made various recommendations, including that large corporates may be permitted to promote banks only after necessary amendments to the Banking Regulation Act.
“There is a lot of evidence that connected lending was the biggest cause of the build-up of bad loans in 1997 in Asia, which resulted in the East Asian Crisis that began in Thailand and turned out to be one of the biggest financial crashes in the world,” he pointed out.