Nobel laureate economist Joseph Stiglitz has expressed discomfort at the idea of allowing corporate houses to own banks, saying this amounted to conflict of interest.
Stiglitz's statement comes at a time when the corporate sector is gearing up to foray into the banking sector, with the Reserve Bank of India (RBI) set to release the final guidelines in this regard.
Earlier, the government had said the central bank would consider giving banking licences to non-banking financial companies and industry houses.
Delivering the 15th C D Deshmukh Memorial Lecture, Stiglitz said, "One of the real problems in the financial sector is there are issues of conflict of interest. And, when you have corporates opening their own banks, you are opening up a venue for corporate conflict of interest."
"If you want to take your own money, that is one thing. If you take depositors' money, you became a part of public responsibility," he added.
The idea of opening new banks was mooted by the government in 2010. In the Budget speech for that year, Pranab Mukherjee, then the finance minister, had said RBI would consider giving fresh banking licences.
Following the announcement, the central bank had released a discussion paper on this and in 2011; it had released the draft guidelines for the process. It is expected the final guidelines in this regard would be issued soon.
Stressing the need for strong regulation of the financial sector, Stiglitz said the model followed by RBI had helped the country weather the adverse fallout of the global financial crisis effectively.
"The regulations and regulators may be imperfect. But the track record of success in India and even in the United States in the decades after the last great crisis, the Great Depression, shows good regulation is possible and can make a difference," he said.
Regulation in the sector was vital, as the sector was characterised by large market failures, he said, adding there were systemic consequences (large externalities) arising from these market failures.
Stiglitz said RBI was viewed as an exemplary central bank. One couldn't help but notice this in the aftermath of the 2008 global financial crisis which, to a very large extent, was brought about by failures of central banks in the US and Europe, he added.
Debunking the notion of self-regulation, he said financial markets had repeatedly been prone to bubbles. When these burst, they left havoc in their wake.
Conflicts of interest and predatory and abusive practices had repeatedly marked financial markets. These were among the reasons the sector had become highly regulated, he added.