Banking Cannot Be Treated as Another Asset Class

The arguments that the Reserve Bank of India should ‘leave private equity alone’, treats banking and credit intermediation as just another asset class, comparable to real estate, infrastructure, or technology platforms.

Banking, especially in India, has never been merely a business. It is a public trust, a social engineering instrument, and a central pillar of macroeconomic stability. Any critique of the regulator that ignores this starting point collapses under the weight of its own assumptions.

Private equity unquestionably plays a valuable role in capital formation. It brings risk appetite, structuring expertise, and operational discipline to sectors that need them. But private equity is not designed to build institutions with a long social memory. Its organising principle is profit maximisation within finite fund lives. Culture, continuity, depositor confidence, and systemic resilience are secondary outcomes, not primary objectives. This neither makes private equity predatory nor the perceived holy-grail. It simply makes it structurally different from traditional bank ownership.

Banks and large lenders intermediate public savings. They transmit monetary policy into the real economy. They allocate credit in ways that shape employment, consumption, and regional development. When they fail, the consequences are not confined to shareholders or sophisticated investors. They spill over to households, small businesses, and eventually the sovereign balance sheet. To argue that ownership norms in this sector should be treated with the same light touch as other industries is to ignore a century of global banking crises, including India’s own experience.

One should not conflate capital availability with credit quality. Credit crises are rarely caused by lack of capital. They are caused by mispriced risk, herd behaviour, and governance failures amplified during growth cycles. India’s credit stress episodes were not born of capital starvation, but of aggressive expansion funded by sophisticated investors who mistook growth for resilience and scale for safety.

There is also a selective reading of history at work. The tightening of oversight after NBFC crisis, and subsequent failures is portrayed as excessive caution. What is often left unsaid is that IL&FS was widely held by marquee institutions, had layers of boards and committees, included highly regarded individuals including officials on deputation, and was considered professionally governed until it collapsed. The lessons learnt was about opacity, interconnectedness, and the dangers of ownership and control structures and operationalising governance.

Interpreting the RBI’s stance in sitting on ownership-changes as regulatory overreach misunderstands both law and mandate. That other regulators have cleared similar transactions is not evidence of excess at the RBI, but of differing mandates and risk horizons. Regulators are not passive referees waiting for legislatures to specify every conceivable risk parameter. They are empowered to interpret evolving ownership and control structures in light of systemic stability. The RBI does not require parliamentary sanction to conclude that excessive common ownership across multiple lenders increases correlated risk, weakens independent governance, and creates incentives for regulatory arbitrage. That judgement lies squarely within its remit.

Also it’s a bit rich to hear claims of overreach from an industry that routinely lobbies stakeholders, negotiates supervisory outcomes, and sponsors policy challenges in public forums to suit them. When the regulator listens, it is praised as pragmatic. When it draws boundaries, it is accused of being doctrinaire.

The assertion that private equity ownership necessarily improves governance also deserves closer scrutiny. It improves financial controls, reporting discipline, and cost efficiency, for sure.  What it has not reliably improved is institutional culture. Banking culture is built over decades through incentive design, internal challenge, and a shared understanding that not all profitable lending is good lending. Fund driven ownership often prioritises growth, valuation uplifts, and exit optionality.

Depositors do not choose ownership structures, time horizons, or exit strategies. They rely on regulation to make those judgements on their behalf. Banks are perpetual institutions. Funds are time bound vehicles. That mismatch is not incidental. It shapes risk appetite, behaviour under stress, and incentives as exits approach. Prudential frameworks are therefore not written for best case investors, but for median behaviour in adverse conditions. Nor is regulation only about rules on paper. It is about supervision, enforceability, and the ability to see through when things go wrong. Markets, by design, forget quickly. Regulators exist to remember. That institutional memory, often mistaken for conservatism, is what prevents optimism from becoming public cost.

Credit markets are not consumer goods markets where price competition automatically delivers welfare gains. Excess competition in lending often leads to underpricing of risk, relaxed underwriting standards, and herd behaviour. When multiple lenders share the same dominant financial sponsor, the appearance of fragmentation masks behavioural synchronisation. What looks competitive in good times behaves uniformly in stress.

It is equally misleading to frame the RBI’s position as hostility to foreign capital. India has consistently welcomed long term foreign investment in finance when it aligns with stability, maturity, and institutional depth. Banking exercises delegated economic authority, which is why ownership must be judged by legitimacy and endurance, not capital alone.

A regulator that draws lessons early and is accused of being conservative is simply doing its job. In banking, the cost of any indulgence is paid by society. That asymmetry, uncomfortable as it may be for capital, is precisely why regulators exist.