Cautions over corporates owning banks

• Recently, P.K Mohanty committee of RBI had recommended allowing large industrial houses and corporates as promoters of banks like:

• Cap on promoters stake in the long run (15 years) may be raised from the current level of 15% to 26% of the paid-up voting equity share capital of the bank.

• Currently, banking regulations make it mandatory for promoters of private sector banks to reduce their ownership to 40% within three years and to 15% in 15 years.

Objective was to:

• Ensure greater financial inclusion, Brings more capital to the banking sector.

• During the last five years, private banks have been able to raise an aggregate capital of Rs 1,15,328 crore from the market as compared to Rs 70,823 by PSBs.

• Bring management expertise, experience, and strategic direction to banking.

Issues with banking licences to big businesses:

• Corporate ownership of banks raises the risk of inter-group lending, diversion of funds, and reputational exposure.

• The issue is exacerbated owing to weak corporate governance in India.

• Further concentration of economic and political power in certain business houses.

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Mains Paper 3: Economy

Prelims level: P.K Mohanty committee

Mains level: Issues with banking licences to big businesses

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