India has not issued a new bank licence since 2004.

There is a persuasive case t

o be made that India s banking sector needs to be more open; but aspects of the re
cent decision to award more licences are, none the less, disquieting. Well-infor
med voices from across the spectrum of opinion have, in the past few days, been
raised against the proposal to allow large business conglomerates to set up bank
s if they have a successful track record
judged, presumably, by the licensing auth
ority
and a minimum capital of Rs 500 crore. The head of the Prime Minister s Econ
omic Advisory Council, C Rangarajan, has urged the Reserve Bank of India (RBI) t
o start by issuing licences to non-corporate businesses first, and to look elsewhe
re only if there are no such qualified applicants. The left-leaning Columbia Uni
versity economics professor and Nobel laureate Joseph Stiglitz said in an interv
iew that it would be very risky to allow companies to own banks. It was not allowe
d in the US, he added, and correctly so; the conflicts of interest that it would
open up were sufficiently great and regulators would not be able to circumscribe t
hem easily or at all . And the right-leaning economist Percy Mistry has also said
allowing industrial houses to run banks would leave massive scope for malfeasance .
Japan, he pointed out, is one country where banks and industries are enmeshed w
ith each other, and it is still to emerge from a two-decade-old financial crisis
.
Three voices as distinct from each other as these, and yet making the same point
s, should give the government pause in its relentless drive towards granting ban
king licences to industrialists. Ever since it was announced in the Budget by th
en finance minister Pranab Mukherjee in February 2010, the government has pushed
hard for it, against an obviously unwilling RBI, the apex regulator for the sec
tor, and in spite of prevailing expert opinion. Banking is not like any other se
ctor the conflicts of interest that can be set up in it have the potential to de
stabilise the entire economy and eventually cost taxpayers a fortune. As it is,
Indian taxpayers are bailing out, through state-owned banks, several companies t
hat have benefited from a cosy relationship with bankers. It is not just possibl
e but probable that banks owned by industrial groups with many and varying inter
ests will use their depositors money to keep their owners concerns going long afte
r other institutions would have thought it wise to withdraw. Eventually such beh
aviour will destabilise the financial system, and the government will be forced
to step in and write some cheques.
The truth is that India needs more world-sized and world-class banks, as the Nar
asimham Committee had argued. This will not be achieved by increassing the secto
r s complexity and instability, the end result of awarding bank licences to indust
rial houses. Instead, the sector must be strengthened. State-owned banks need to
be gradually privatised
whatever the horrified reactions in the Congress to rev
ersing Indira Gandhi s decads-old mistake
and foreign banks need to operate with f
ewer restrictions.