Changes in laws and regulations are needed before corporates can be allowed to promote banks. This is to prevent corporates from using banks as private pools of readily available funds, Dr D. Subbarao, RBI Governor, said here on Tuesday.

“By far the biggest apprehension (whether corporates should be made eligible to promote banks) is about ‘self-dealing' — that corporates will use the bank as a private pool of readily available funds,” said Dr Subbarao in his address at the FICCI-IBA Banking Conference.

The Governor's comments come at a time when the central bank is weighing the possibility of allowing corporates to promote banks.

Large corporates such as the Tatas, AV Birla Group, Anil Dhirubhai Ambani Group, Bajaj, and Shriram Group plan to seek the regulator's permission to float banks once the RBI draws up the final guidelines on new bank licences.

Gaps in law

While there are extensive statutory and regulatory prescriptions against self-dealing, there are still gaps.

For instance, 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 prohibition on the bank lending to the corporate. This opens up opportunities for self-dealing, explained the Governor.

It is not easy for supervisors to prevent or detect self-dealing because banks can hide related-party lending behind complex company structures or through lending to suppliers of the promoters and their group companies.

Even as he flagged the issue of self-dealing by corporates in case they are allowed to promote banks, the Governor pointed out that the strongest point in favour of corporates is that they can bring in the capital, business and managerial competence.

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