largely on the recommendations of the internal working group ( iw g ) constituted by the reserve bank to examine these issues. the reserve bank has accepted 21 out of the 33 recommendations made by the group and had announced this decision on november 26, 2021. however, there are some issues where the recommendations have been extensively debated and therefore require further examination. licensing and ownership of private banks in india 5. it is generally accepted that a deep, stable, and sound financial system contributes to economic growth. but for growth to be truly inclusive, broadening and deepening the reach of formal finance is a pre - requisite. access to formal finance is especially critical for the lower income groups as it provides them with the opportunities to save, invest, avail of credit, and grow their incomes through productive enterprises and activities. this provides them the much1 / 6 bis central bankers'speeches needed insurance against future income shocks and helps them to manage emergencies. the guidelines for licensing of new banks in the private sector issued by the reserve bank since the initiation of financial sector reforms in early nineties, have been guided by the above philosophy. in addition, the choices have also been informed by the need to instil greater competition in the banking system to increase productivity and efficiency. so far, eight sets of licensing guidelines have been issued by the reserve bank, of which four are for universal banks and four pertain to differentiated banks. 6. after the recent iw g report, the public discourse has mostly been concentrated on their recommendation for granting banking license to large industrial houses. however, a little historical perspective on this issue would be helpful. in the licensing guidelines issued in 1993, there was no explicit ban on setting up banks by large corporate / industrial houses ; the licensing guidelines of 2001 did not allow banks to be promoted by a large corporate / industrial house, while in terms of the 2005 guidelines on ownership and governance in private sector banks, large industrial houses were allowed to acquire up to 10 per cent holding in a bank with the prior approval of the reserve bank. under the licensing guidelines issued in 2013, the banks were to be mandatorily set up through a wholly owned non - operative financial holding company ( nofhc ). individuals were not allowed to promote banks under these guidelines, but again there was no bar on large corporate / industrial houses to be promoters. the ‘ on - tap ’ guidelines of 2016 defined large industrial houses and restricted them from promoting a bank, but at the same time, they were

permitted to invest in a bank to the extent of 10 per cent. the small finance banks ( sfbs ) licensing guidelines issued in 2014 and 2019 made large public sector entities and industrial houses, including nbfcs promoted by them explicitly ineligible to set up such banks. 7. many committees set - up on the subject in the past as well the iw g have acknowledged that the large corporates / industrial houses can be an important source of capital and can provide management expertise and strategic direction given their pool of entrepreneurial and managerial talent. there is also the issue of finding fit and able promoters with deep pockets to set up a large technologically equipped universal bank. however, at the same time concerns were raised by all of them, including the iw g, on the attendant risks which come to fore. these include – conflicts of interest through self - dealing at the expense of bank clients and in the transactions between the bank and its affiliates, favouring associates for extending loans and undermining the neutrality and independence in deciding allocation of credit and constricting the flow of credit to competitors. caution was also warranted around issues of connected lending, complex web of group structures, crossholding as well as presence of large number of unregulated entities in the group, as these would stretch the rbi ’ s regulatory and supervisory resources. another oftquoted argument also points to the principles of separation of banking and industry / business. while it is an accepted fact that the relationship between financial economy and real economy is symbiotic, de facto merger of the segments may actually aggravate the systemic risks. 8. given that banking is a highly leveraged business dealing with public money, it makes sense to keep industry / business and banking separate. this separation is expected to avoid spill over risks – where trouble anywhere in the group entity may result in transferring risks on to the depositors, leading in turn to claims on deposit insurance with subsequent ripple effects cascading across the largely interconnected financial systems, creating concerns around financial stability. these issues have been flagged by the iw g also and therefore, it is necessary that we closely examine the related matters before thinking of permitting large industrial houses or nbfcs owned by such houses to set up any new bank. to conclude, let me just say that the jury is still out on the issue. shareholding and structure 9. diversification of ownership in banks is considered desirable in the long run as concentrated shareholding may expose them to the