Banks have advised the Reserve Bank of India against allowing industrial houses to enter the banking space, even as industry associations, non-banking financial companies (NBFCs) and microfinance institutions (MFIs) have been in favour of corporates into banking.
“Banks were not in favour of the proposal due to the unsavoury past experience in India and abroad and that large capital buffer that would be available to the banks sponsored by industrial/business houses would create an uneven playing field with the existing banks,” the RBI said in a statement here.
The RBI also said those who argue against entry of industrial houses to promote banks said any such move would aggravate the already skewed concentration of wealth and political influence, besides creating an uneven playing-field with the existing players.
Industry associations and NBFC and MFI sectors have been generally in favour of permitting industrial houses to promote new banks.
The arguments in favour are based on the premise that talent of industrial and business houses, which have the entrepreneurial and managerial talent in running asset management companies, mutual funds and insurance companies and have successfully penetrated into rural India, could be gainfully harnessed in the banking sector. “Moreover, industrial houses could bring to banking strong governance practices, management expertise, talent, innovation and global best practices especially in customer service, as they have had a long history in nurturing and developing businesses,” those in favour argued.
They further said financial inclusion requires higher scale of operations which the industries would be able to bring by deploying large capital.
Those against granting such licenses fear that there would be “connected lending” by combining banking and commerce. “India does not have enough experience in supervising in a scenario where banks are owned by diversified corporates, and allowing such ownership could have serious potential disasters,” these arguments said.
They also said India already has a concentrated wealth structure, which influences political decisions.
“Allowing industrial houses to own banks will exacerbate the concentration of economic power and political influence,” they said.
The RBI had come out with a discussion paper in August this year on granting of new banking licenses, giving pros and cons of various scenarios.
Diverse views were also received on other asked questions like minimum capital requirements for new banks, promoters' and foreign shareholding in new banks and conversion of NBFCs into banks or promoting new banks. As for the minimum capital requirement of new banks, industry chambers and banks were in favour of a high start up capital of Rs.1,000 crore, which would be further raised to Rs.1,500-2,000 crore over a period.
However, MFIs and NBFCs preferred a lower start up capital ranging from Rs.300-500 crore. “With this capital requirement, it has been argued that 30 to 40 banks could be licensed within a period of next 5-10 years with dedicated focus on financial inclusion,” the statement said. On promoter shareholding in new banks, while the industry associations suggested a range of 40-51 per cent, NBFCs and MFIs preferred a lower range of 30-40 per cent.
On the issue of foreign shareholding in new banks, the RBI said the suggestions received in this regard ranged from capping the shareholdings at 50 per cent to have no restrictions at all.
Among the industry chambers, while some of them advocated putting a cap at 50 per cent, others have suggested continuing with the existing norm of 74 per cent or not having any restriction for the initial period of 10 years.
Keywords: Indian banking sector