What is Connected Lending and Why is Raghuram Rajan Against It?

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What is Connected Lending and Why is Raghuram Rajan Against It?
Credit: © Reuters.

By Aditya Raghunath

Investing.com -- An internal working group (IWG) set up by the RBI (Reserve Bank of India) has proposed that large business groups be allowed to set up banks. The plan also gives large, well-run NBFCs (non-banking financial companies) the option of converting into banks.

The IWG had consulted multiple experts with respect to this proposal. Except for one, all other experts opposed the entry of large businesses into banking. The logic behind the opposition is that this could give rise to connected lending, a system where the owner of the bank gives their company or companies or connected parties (his friends and families) loans at lesser rates of interest. Basically, if you own a bank you can lend yourself money at a lower rate of interest for a risky project.

Even though the IWG clearly says that large business groups will be allowed as promoters of banks only after necessary amendments to the Banking Regulation Act, 1949, former RBI Governor Raghuram Rajan posits that if the Indian banking system was so strong on regulation, the sector would not have had such a large problem of NPA (non-performing assets) and bad loans. The Indian banking sector has been one of the worst-performing ones in recent times given regulatory issues that grappled companies such as Yes Bank (NS: YESB ), Punjab National Bank (NS: PNBK ), and more recently Laxmi Vilas Bank. 

Rajan called this proposal a ‘bombshell’ in an article he authored and said that this proposal is ‘best left on the shelf’.

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  • Kalaignanam Gsekar @Kalaignanam Gsekar
    true. it is a serious long term view imo
    Like 0
  • Equity Track @Equity Track
    RBI IWG is coming up with innovative ideas to swindle public money and shock the public. Eventually, public will turn to physical Gold investment as in olden days when they loose confidence in banks.
    Like 2
  • Anil Tunk @Anil Tunk
    Foget a person .. A Scamster allowed illegal things being a head .. Dont take him seriously..
    Like 1
    • Renjith Rajan @Renjith Rajan
      who r u judge him
      Like 0
    • Renjith Rajan @Renjith Rajan
      who r u judge him...he is not Subbu
      Like 0
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