A working group of the Reserve Bank of India recommended a number of changes, the details of which were published last week, which include allowing industrial houses to act as so-called bank promoters, meaning they could take a large stake in a lender.
“The working group’s concerns regarding conflicts of interest, concentration of economic power and financial stability by allowing companies to own banks are potential risks,” the note said.
Business ownership with banks increases the risk of lending between groups, diversion of funds and reputation exposure, S&P said, adding that the risk of infection from corporate default will also increase significantly if industrial buildings are at the helm of a bank.
Last week, India placed a private lender under moratorium for a month due to a “severe deterioration” of its economy. .
Non-performing assets (NPAs) in the business sector remain high, although they have fallen from 18% in March 2018 to 13% in March 2020, S&P said.
The panel’s recommendations also include allowing shadow banks to convert to lenders, which could improve financial stability, the rating agency said.
The Central Bank has invited comments on the committee’s report, which can be submitted until 15 January 2021.