Corporate ownership of banks may work against larger public interest: RBI governor

Banks and financial institutions have to ensure that their profit motive does not work against the larger public interest of equity and a horizontal spread of economic growth and any corporate ownership of banks should ensure this, Reserve Bank governor D Subbarao said today.

Addressing the FICCI-IBA Banking Conference, Subbaro said while capital adequacy and corporate governance are important, banks are different from other corporates in important respects, and that makes corporate governance of banks not only different but also more critical.

The prime concern is about corporates using banks as private pool to draw money when needed. While there may be checks like curbs on lending to directors or their kin, there are also ways of circumventing these rules, he pointed out.

"By far the biggest apprehension is about 'self-dealing' - that corporates will use the bank as a private pool of readily available funds," Subbarao said.

If a corporate has an interest in a bank as a promoter or a shareholder, but has no position on the board, then there is no bar on the bank lending to the corporate, as otherwise it would open up opportunities for self-dealing, he said.

Supervision of such dealings also will be difficult since banks can hide related-party lending behind complex company structures or through lending to suppliers of the promoters and their group companies.