RBI chief Subbarao supports corporates in banking sector

Reserve Bank of India governor D Subbarao yesterday, defended the decision of the central bank to make corporates eligible for bank licences, saying that responsible regulation involved being ''pragmatic'' and not ''dogmatic''.

Elaborating on what he called responsible regulation, the RBI governor said an important characteristic of such regulation was open-mindedness and the willingness to change regulations to suit the changing circumstances.

He defended the RBI's decision to make corporates eligible for bank licences, which, he said, had been taken after due diligence and deliberation.

Delivering the keynote address on innovation and regulation in the financial sector at the Institute of Development and Research in Banking Technology in Hyderabad yesterday, he said the bank took a pragmatic view in response to the changed situation and determined that giving corporates entry to the banking sector would be net positive.

The opposition to allow corporates play in the banking sector was centred around ''misuse' of public funds for private gain and that banking in the hands of corporates would lead to concentration of economic power and political influence.

But the bank factored in the proven entrepreneurial talent and management expertise that the corporate sector could offer as also the scope for bringing in vast pools of capital that would help in strengthening financial inter- mediation.

In a bid to allay fears Subbarao said corporates would bring in large amounts of capital and making the sector more competitive.

Among the 26 private entities that have applied for licences to open banks are Tata Sons, India's biggest business group, and firms controlled by billionaires Anil Ambani and Kumar Mangalam Birla.

He said corporates had also been allowed in other segments of regulated financial activities such as mutual funds, asset management and insurance.

"The balance of arguments for and against corporates in the banking sector has changed," Subbarao said. "The Reserve Bank took a pragmatic view and determined that allowing corporates into the banking sector would be net positive."

The RBI chief said arguments of critics, including those related to ownership structures of large corporates, were not without merit and the RBI had had tried to address these.

"That is the reason we have built several safeguards into the licensing regime by prescribing demanding criteria for the corporate structure, fit and proper criteria, corporate governance norms, exposure norms, and others," he said.