- Conflicts of Interest (Inter-connected Lending):
- Promoter/owner of the bank is also a borrower.
- Possible to channel depositors’ money into their own group companies.
- Funds can be directed to cronies at relaxed terms.
- Banks can provide finance to customers and suppliers of their businesses.
- Increases concentration of economic power.
- Financial Stability Risks:
- RBI can only react to interconnected lending ex-post.
- Tracing funds through maze of entities is challenging.
- Any RBI action could cause flight of deposits and precipitate bank failure.
- Banks owned by corporates are exposed to risks of non-bank entities in the group.
- If non-bank entities face trouble, bank sentiment is impacted.
- Depositors would need protection via public safety net.
- It is prudent to keep borrowers (big corporates) separate from lenders (banks).