The process for issuing new bank licences is gathering pace. Reserve Bank of India (RBI) Governor Raghuram Rajan has said that a few licences will be issued by January 2014, less than three months from now. An important step towards that end has been the setting up of a committee headed by former RBI Governor Bimal Jalan to vet the 26 eligible applications, after the RBI has scrutinised them initially.

This external scrutiny was built into the procedure. It has been the intention of the RBI to keep the process as free from controversy as possible.

The committee has three other members, former RBI Deputy Governor Usha Thorat, former SEBI Chairman C. B. Bhave, and Nachiket Mor, former ICICI Bank official, who is into financial inclusion in a big way.

Stringent norms

The applicants, drawn from the public and private sectors, had to meet the RBI’s stringent norms for setting up new banks.

These, as set out in the RBI’s notification of February 22, include a minimum capital of Rs.500 crore and have sound credentials and financial track record of 10 years. Foreign capital will be allowed to an extent of not more than 49 per cent.

Obviously, it is not the quantifiable target as much as the subjective criteria that will pose daunting challenges. Checking the credentials of promoters is not going to be easy at all, and will lend itself to controversy. For instance, an FIR filed against Kumar Mangalam Birla, in his capacity as the chief promoter of Hindalco in the coal scam, has led to speculation, whether the A. V. Birla group, one of the top eligible contenders for a bank licence, will be disqualified. There being no precedent, it would be interesting to see whether a totally extraneous development can derail the bid of one of India’s most admired groups.

Controversial issues

In any case, the process of awarding a new bank licence was never expected to be smooth. Among the several controversial issues, allowing large industrial houses to start a bank has been the most contentious. A very large number of respondents to RBI’s discussion paper were not in favour of awarding licences to big business houses.

However, such policy issues have been decided. A few large industrial houses will be given permission to start banks. Amidst the riveting interest on the subject, two related developments merit attention.

Role for foreign banks

Dr. Raghuram Rajan might have stirred a controversy by hinting at a larger role for foreign banks in India. In a speech in the U.S. he had said that foreign banks will be allowed in India, provided they incorporate themselves under Indian laws. Equally importantly, their governments must follow the principle of reciprocity, meaning that they must allow Indian banks to open branches there. Further, these banks will be allowed to buy a few local banks. It is the last point that has created some confusion. There is no hint of such a radical move in a policy paper that RBI has put up on its website. There is also the basic point whether there would be enough candidates in the form of small banks that can be taken over. Thus, although not having a direct bearing on the issue of new licences, Dr. Rajan’s statement might be an avoidable distraction.

Tough message

Another development that clouds the picture is the settlement one of the biggest global banks JP Morgan Chase reached with authorities in the U.S. to earn a reprieve from civil prosecution though not criminal cases. The bank agreed to pay a record $13 billion to federal and state agencies in settlement of cases relating to its role in the sub-prime home loan crisis of 2008 which morphed into a global economic crisis. Five years on, the U.S. regulators are sending out a tough message after being accused of going soft on banks initially.

There may not be banks of the size of JP Morgan Chase in India. Nor has any bank, foreign or Indian, been guilty of alleged acts of misdemeanour of gargantuan proportion.

Yet, the question is do we have a regulator and rules to regulation to take on such banks should such an eventuality arise.