Conglomerates being considered for new banking licences in India should be asked to have systemic controls to safeguard against any contagion impact of problems in their other businesses, eminent banker Uday Kotak has said.
Joining the debate on who should be allowed entry in the sector, Kotak, who runs one of the newest banks in the country - Kotak Mahindra Bank - said that lenders are systemic in nature and the process of granting new licenses would need to be crafted very carefully.
"We welcome new banks. But we have to keep in mind that banks are systemic in nature and therefore the process of opening up the sector for new players has to be carefully crafted," Kotak told PTI in an interview at the annual meeting of the World Economic Forum.
He further said: "It is extremely important that we remember that banks are sacred and therefore the players who come in, if they have conflict of interest, there should be an ability for systemic controls."
Asked whether Chinese-Wall like measures would be enough to manage conflicts of interest in case of large industrial conglomerates getting into banking, Kotak said: "The key issue in that debate is that we need to ask a simple question - if the water level go up, what will be the priority of the corporates - Saving the corporate group or using depositor's money in the bank?
"And we need to ask how good is our ability on regulations and system to ensure that there is no contagion."
Many corporate entities, including Anil Ambani-led Reliance Group, financial conglomerates Religare and Shriram groups, engineering-to-technology major L&T group and Aditya Birla group, are said to be interested in entering the banking business depending on the regulatory framework.
Meanwhile, the Finance Ministry has favoured that the Reserve Bank should allow real estate companies and broking firms to set up banks as adequate safeguards would be there to prevent exposure of promoters to related entities.
The Ministry had said that such entities can be allowed, but there should be complete ban on taking exposure in the group companies or entities related to promoters.
Last month, the Lok Sabha passed the Banking Laws (Amendment) Bill, 2011, paving the way for establishment of new private banks, among others. The Reserve Bank of India (RBI) had issued draft guidelines in August 2011.
Recently, a well known economist and Nobel laureate Joseph Stiglitz had said corporates should not be allowed to enter banking space as it has the potential to create conflict of interests.
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