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Context: An internal working group had recommended allowing corporates in the banking sector but the 'bombshell' proposal doesn't find a mention in the list of suggestions accepted by the RBI on November 26?.
If implemented then
Former RBI Governor Raghuram Rajan and former RBI Deputy Governor Viral Acharya have criticised the suggestion by the IWG, describing it a “bombshell”.
What is connected lending?
Pros of Allowing Corporates To Own Bank
Cons of Allowing Corporates To Own Bank
Connected Lending & Moral Hazard: A bank with no connections to business houses can effectively screen loan applicants and thus ensure efficient allocation of funds to accelerate the overall growth of the economy.
Circular Lending & Difficulty In Regulation: Another risk associated with banks owned by industry groups is circular lending.
Inequality & Concentration of Wealth: Corporates owing banks will add more muscle to big industry groups, which already dominate many important sectors of the economy, including telecom, organised retail, aviation, software and e-commerce.
Contradicting the Previous Ruling: The banking sector in India has been in trouble for the last few years, keeping that in mind the RBI in 2016 had created new guidelines on the limit of lending to a single company.
By: Shubham Tiwari ProfileResourcesReport error
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