This year’s crisis of trust in India’s shadow banking sector has taken its most high-profile victim yet. Anil Ambani, the younger brother of India’s wealthiest man, has been taken over by the central bank, which has hired an administrator and will shortly submit the company to the bankruptcy courts.
It is clear from the collapse of Reliance Capital NSE -4.99 percent Ltd. that the Reserve Bank of India is still wary of allowing large corporations to enter mom-and-pop banking, despite enormous pressure to do so in order to rekindle credit growth. Even without access to protected accounts, the financiers’ ability to injure is fatal.
Many Indian shadow banks have gone down since September 2018, when infrastructure financier IL&FS Group collapsed. One of India’s richest men, Ajay Piramal, purchased Dewan Housing Finance Corp. Bankruptcy proceedings have begun for two of Srei Infrastructure Finance Ltd. and Srei Equipment Finance Ltd., which were taken over by the RBI last month.
For failing deposit-taking institutions, bankruptcy is not an option since they are being addressed via “shotgun weddings.” The State Bank of India was compelled to rescue Yes Bank Ltd. for the greater good of the country. A considerably smaller bank, Lakshmi Vilas Bank Ltd., was permitted to go bankrupt by Singapore’s DBS Group Holdings, while the big corporate lender is still operating freely. Fintech and financial technology firms bought Punjab & Maharashtra Co-operative Bank, which has been implicated in several scams, but depositors would only see their money in 10 years.
Last year, an internal working committee proposed that the Reserve Bank of India open the floodgates of banking to huge industrial enterprises. To keep track of “connected lending” between banks and nonbank business interests of controlling owners, particularly if they happen to be politically prominent, the Indian regulator will need significantly more supervisory capabilities than it now has.
The blunders of Anil Ambani should serve as a lesson to others. Debenture holders are Reliance Capital’s unpaid debtors. Customers of Ambani’s world-class bank would have been savings and current account holders had he obtained the go-ahead. Many modest depositors may lose trust in the Indian banking system if the RBI makes them wait a decade for their money to be returned.