Don’t give bank licences to corporates, says Stiglitz

Giving banking licences to corporate entities is a step fraught with risks, Nobel laureate Joseph Stiglitz has warned.

“One of the real problems in the financial sector is that there are issues of conflicts of interest,” the economist said at the 15th CD Deshmukh Memorial Lecture, organised by the Reserve Bank of India.

“And when you have corporates owning their own banks, you are opening up a venue for corporate conflicts of interest.”

Stiglitz said he would be inclined not to allow grant of banking licences to corporates.

“If you want to take own money that is one thing, if you take depositors’ that’s another thing, because then you become part of a public responsibility. The dangers of conflicts of interests outweigh any economies of scale,” he said in the lecture titled ‘A Revolution in Monetary Policy: Lessons in the Wake of the Global Financial Crisis’.

So far, RBI has been wary of allowing corporate entities to be promoters of banks due to the risk of promoters indulging in lending to group entities.

Indeed, it had insisted on the passage of the Banking Laws (Amendment) Bill 2011 as a pre-condition for issuing new banking licences. The legislation, which Parliament approved on December 20, would give it more teeth in dealing with banks.

The central bank is yet to issue the final guidelines, after which interested companies can apply for banking licences.