Must be extra vigilant to protect the interest of the depositors, says the RBI Executive Director

Even as a debate is raging over the wisdom of allowing industrial and business houses to apply for new bank licences, the Executive Director of the Reserve Bank of India, B. Mahapatra, asserted that the apex bank would have to be extra vigilant in the evolving context.

In his inaugural address at the National Institute of Bank Management Conclave on ‘Implications of new bank licences’ in Pune on Saturday, he said the regulatory and supervisory effectiveness of the RBI would be tested in preventing the new banks promoted by industrial and business houses from self-dealing.

“In the context of new bank licensing, serious concerns have been raised on the issue of allowing industrial/business houses to own banks,’’ he said.

This would be a new experiment in India after nationalisation of commercial banks in 1969, he pointed out.

Ring-fencing

He, nevertheless, asserted that the new bank guidelines had adequate arrangements for ring-fencing the financial services activities of the promoter groups from their non-financial (manufacturing/trading/others) activities. These guidelines had also addressed the issue of conflict of interests by prohibiting lending to and investments in promoter group entities, he pointed out.

“The RBI has also been vested with adequate powers through amendments to the Banking Regulation Act, 1949, to supervise these banks in a consolidated manner,’’ he said.

“It is yet to be tested whether the ring-fence would work effectively or could be circumvented,’’ he added. Given this, he felt the RBI must be extra vigilant to protect the interests of the depositors.

Auction demand

Mr. Mahapatra said fairness and transparency of the licensing process were no less important given the enthusiasm shown by corporates and others alike to get banking licence.

There were even suggestions from certain quarters for auctioning of new bank licences, he pointed out. “No doubt, banks are for public good.

But, banks are special. They are highly leveraged financial institutions. They are the conduits for monetary policy transmission, and constitute the core of payment and settlement system. They accept uncollateralised deposits from members of public, and their deposits are insured,’’ he pointed out.

Asserting that the purpose of issuing new bank licences was to serve public interest, he said, “auctioning of bank licences is unheard of in any jurisdiction.’’

Considering the need for fairness and transparency, it was decided to place the names of the 26 applicants for bank licences on the website of the RBI, he said. These would be subject to multi-layered scrutiny within the RBI and also by a high-level advisory committee comprising eminent personalities with domain knowledge, he pointed out.

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