The recent report of an internal working group constituted by the Reserve Bank of India in India remains a matter of discussion.

This Internal Working Group (IWG) was formed to review the existing ownership guidelines and corporate structure for private sector banks in India.

The recommendations of this Working Group remain a cause for discussion as it suggested that after necessary amendments in the Banking Regulation Act, 1949, large corporate / industrial houses may be allowed as promoters of banks.

This means that large corporate houses like Adani, Ambani, Tata, Piramal and Bajaj can take a license for the bank and if they are found suitable, they can also open a bank.

It cannot be argued that the Indian banking system is very weak.

The report of the Internal Working Group states, "At the time of India's independence in 1947, commercial banks (many of these banks were under the control of business houses) were lagging behind in meeting social objectives. Therefore, the Government of India nationalized 14 large commercial banks in 1969 and 6 in 1980.

"However, with the introduction of economic reforms in the early nineties, the role of private banks has become increasingly accepted."

The report also considers the fact that "the Indian banking sector has grown significantly in the last few years but the total balance sheet of banks in India is still less than 70 per cent of GDP, which is equivalent to the global counterparts." Much less than that for a bank-dominated financial system. '

This means that Indian banks are struggling to meet the growing demand for finance of a developing economy.

Currently State Bank of India is the only bank in India that is a part of the top 100 banks in the world. The report states that private sector banks are outpacing public sector banks as they are more efficient, profitable and risk takers.

According to the report, "Public sector banks are continuously losing market share in the hands of private banks, this process has accelerated in the last five years."

There is no doubt that if India wants to become a five trillion dollar economy, it will have to grow its banking sector and IWG's suggestions are mostly related to this.

But, former RBI Governor Raghuram Rajan and former Deputy Governor Viral Acharya have raised the problem arising out of it. Raghuram Rajan has shared a post about it on his LinkedIn account.

In this three-page post, he has said that allowing corporate houses to enter the banking sector is explosive.

He has also questioned the timing of these recommendations.

Rajan and Acharya said in a joint post, "Have we come to know of anything that allows us to disregard all precautions before allowing industrial houses into banking?" We will not argue. In fact, on the contrary, today it is even more important that the tried and tested boundaries of corporate participation in banking be maintained. ''

Rajan and Acharya say that if allowed to do so, the economic power will be reduced to the hands of a few corporates.

These corporates themselves also need financing and in such a situation, they will easily withdraw money from their own banks. It would be very difficult to question them. This will lead to a bad debt situation.

Rajan and Acharya wrote, "The history of such linked debts has been extremely disastrous. When the borrower is the owner of the bank, how will the bank be able to give the loan properly? Even an independent and committed regulator with access to information around the world is difficult to monitor everywhere to prevent bad debt distribution. Information on loan performance is rarely timely or accurate. Yes Bank managed to hide its weak credit risks for a long time.

He also said that the regulator can also come under heavy political pressure due to these entities.

Rajan and Acharya said, "In addition, highly indebted and politically connected business houses will have the ability to force more licenses. This will further increase the importance of money power in our politics. ''

Both have agreed that India needs more banks because the amount of money deposited for GDP is very low i.e. how much capacity does the country have to pay its liabilities?

He has emphasized that "RBI has allowed the first industrial houses to come in with the payment banks." These banks can tie up with other banks to provide retail loans (such as personal loans, credit cards and mortgage). ''

They have said that when we already have these options, then why do we need to give license to industrial houses to open a full bank? Why now? That too at a time when we are trying to learn a lesson from the failure of ILFS and Yes Bank?

Apart from the timing and intentions of this recommendation, both have suggested that handing over poorly performing public sector banks to corporates would be extremely silly.

Giving these public banks to corporates means that we will hand over bad administration of these existing banks to disputed ownership of corporates.

International ratings agency S&P Global Ratings has also voiced concern about these recommendations. The agency said "internal conflicts of interest, potential conflicts of interest, centralization of economic power and financial stability are potential risks in allowing corporates to open banks."

There is no doubt that India needs finance to grow and public sector banks are not able to do so.

The government is already facing major challenges due to the corona virus epidemic. In such a situation, large industrial houses having financial capacity can meet the lack of money in India. But how safe is it to allow these corporates to own banks completely, the question remains to be answered by the RBI.

RBI has invited to express its views on the committee's report which can be submitted by 15 January 2021.

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