"I think, the real problem in the financial sector are issues of conflict of interests. And when you have corporates opening their own banks, you are opening a venue for conflict of interests," Stiglitz said replying to a question on new banking licences expected to be issued by the Reserve Bank and interest shown by the corporates for the same.
Stiglitz drew parallels with the US scenario, specifically to the one concerning rating agencies to highlight the possibility of conflict of interest.
"You can only hope that you can monitor them and we hope that credit rating agencies do their jobs too," he said.
Stiglitz was in the city for delivering the C D Deshmukh Memorial Lecture organised by the Reserve Bank of India.
The Parliament has recently passed amendments to banking laws, which pave the way for the entry of new players into the arena.
A slew of corporates have evinced interest in entering the fray and ball is in the court of RBI, which is yet to come up with final guidelines regarding the eligibility criteria.
He also said the argument of bringing 'economies of scale' by giving licences to corporates did not hold water.
"The dangers of conflict of interest outweigh any economies of scale that I can bring up," Stiglitz said.
Drawing parallel between the debate in the western world regarding the conflict of interest with respect to separation of investment banking and pure banking operations, the world renowned economist also said that a Chinese wall can not be created between the two.
Referring to management of banking regulations, he said the RBI has done a commendable job both in avoiding the crisis as well as during the last four years since the crisis set in.
Mr.Stiglitz's words of caution need to be heeded by both RBI and the Govt. of India. One of the factors enabling India to escape the global financial melt down of 2008 with minimal damage was the relatively tighter control on the banking operations here. RBI's insistence on following the time honoured principles of prudent financial management should help us in future too. As Stiglitz is pointing out the issue of conflict of interests in case of corporates setting up their own banks is too serious to be ignored. Of late one has been hearing about ' regulatory forbearance'. Such subtle pressures on the regulators can lead to financial adventurism and hence can be dangerous.
JS confirmed our confounded fears on the recent amendment to bank licensing policy to permit corporate houses to have banking licenses. Any policy should have a historical perspective and a vision for the future. When Insurance and Banking were nationalised in this country, it was to take these services away from the stranglehold of the corporate houses that were using public deposits for building private profits and to help those that did not have access to these services. Today, Government chose to reverse this policy and funnily cites financial inclusion as its goal. Even when public sector banks had to be driven by the regulators to the doors of the poor through compulsive targets, to expect the corporate houses to house banking facilities for the poor and unreached population is to say the least, ludicrous. The Government would have done well to reduce the fiscal deficit by selling the taken-over shares back to the corporates at market prices.
Corporates entering banking space should do a lot good to the massive population who are still uncovered by the banking space. With the DCT in the offing, and with difficulties in travel in cities and towns,more banks,more branches, its ATMs etcat frequent distances etc., would provide bank's real entry into a majority of the population. These are the practical aspects of day to day living and ground reality. Saving bank activity by post offices is not a major success since their not having cash to pay the customers sinnce they depend on their head offices etc., for cash and thereby cannot pay the customers when they need money. seeing to broadly the enhancing banking activity in a general way and keeping the interests of common people, more banks,more branches etc., are the solutions.
I always had the fear of conflict of interest between business houses and their banking operations; we should learn from the experience of private insurance companies in early days who had their own interest in mind and acted against public interest which is the reason why perhaps Govermment had to nationalise insurance companies. Will banking regulation by RBi be sufficient to excercise control over private banking.
sir, JS is right about the conflict of interests between banks and corporates and must not, therefore, be allowed. its for the RBI and the goi to ensure this vital safeguard.