IMF warns India of the risks of allowing business houses into banking

The International Monetary Fund (IMF) has cautioned that India risks supervisory oversights by issuing banking licences to corporate entities even as the government is prodding the Reserve Bank of India (RBI) to issue new bank licences to stock broking and realty firms.

India needs to improve its financial system supervision and crisis preparedness while at the same time liberalising some sectors to reduce distortions and risks created by heavy state involvement in banking, the International Monetary Fund (IMF) said on Tuesday.

The IMF suggested implementation of a comprehensive framework before deciding on the entry of "mixed groups and conglomerates" into commercial banking.

"In the current context, the risks may outweigh the benefits... The legal, operational, and regulatory framework for consolidated supervision of both bank-led groups and financial conglomerates is still missing some important elements," IMF said in its report `India: Financial System Stability Assessment Update', released on Tuesday.

"Even greater complexity is introduced in supervisory frameworks when a significant part of the group is engaged in non-financial activity, the risks of which are not well captured by current supervisory frameworks. This may lead to concerns of 'under the radar' risk transfer; concentration of risk exposures; and contagion across the group," it said.

The warning comes at a time when Indian corporates, including Anil Ambani-led Reliance Group, Religare, Shriram, L&T and Aditya Birla group, are keenly awaiting final guidelines for their entry into commercial banking.

In fact, the finance ministry is reported to have asked the RBI to delete the clause prohibiting promoters of realty and stock broking firms from applying for bank licence.

According to the ministry, since there is a complete ban on new banks' exposure to the promoter and promoter group entities or any individuals associated with that, there is no need to keep this restriction on the businesses of the promoter group.