S&P Global Ratings said on Monday a recommendation from the Reserve Bank of India committee to allow industrial conglomerates to set up banks as part of proposed changes to the banking sector, is fraught with risk.
A working group at the Reserve Bank of India (RBI) recommended a series of changes, details of which were made public last week, that include allowing industrial houses to act as so-called bank promoters, meaning they could take a major stake in a lender.
“The working group’s concerns regarding conflict of interest, concentration of economic power, and financial stability in allowing corporates to own banks are potential risks,” S&P Global Ratings said in a note.
Corporate ownership of banks raises the risk of inter-group lending, diversion of funds and reputational exposure, S&P said, adding that contagion risk from corporate defaults would also rise significantly if industrial houses were at the helm of a bank.
Last week, government placed a private lender under moratorium for a month due to a “serious deterioration” in its finances.
Non-performing assets (NPA) within the corporate sector remain elevated even though they came down from 18 per cent in March 2018 to 13 per cent in March 2020, said S&P.