Give bank licences to NBFCs, MFIs; not corporates: PM’s adviser

Honorary economic adviser to the prime minister and former chief of the International Monetary Fund Raghuram Rajan said on Friday that corporate houses should not be granted banking licences, and preference should be given to other players in the finance sector such as non-banking finance companies and microfinance institutions. 

He was speaking in Mumbai after delivering a lecture to commemorate the birth centenary of HDFC founder H T Parekh, Rajan said, the old RBI policy of not allowing corporates to set up banks was a sound one, which he continued to support. "I still stand by that. Whether it will continue is a different question." 

Rajan said that there was already sufficient competition in the financial sector and that while granting licences to new players would help rai8se financial innovation, preference should be given to those already in the sector.
 
He said that there were a number of NBFCs and MFIs, and that first priority should be to give them a banking licence rather than to corporate houses. 

Rajan, the Eric J. Gleacher distinguished service professor of finance at the Booth School of Business, University of Chicago, said that if corporates are allowed, the regulators should ensure that they did not indulge in inter-group lending and proper risk management measures were introduced.
 
He also said that new entrants should not be allowed to scale up operations very fast. "If you allow unbridled growth by untried participants there could be problems," he said. 

Rajan's comments come at a time when RBI is set to come out with guidelines to grant banking licences. The central bank is under pressure from the government to release fresh licences. 

In his budget speech last year, finance minister Pranab Mukherjee had said that RBI would be granting fresh banking licences and in this year's Budget speech he reiterated that RBI's draft guidelines would be issued by 31 March. However, RBI has not yet announfced the new guidelines.