That the Reserve Bank of India's discussion paper on licensing of new private banks has invited widely divergent comments is not surprising. The document, which stopped short of laying down guidelines, only indicated possible approaches and spelt out the pros and cons of each of them, after reviewing the domestic and international experience. The six key issues that have elicited good response are: minimum capital requirement; promoters' contribution; cap on promoters' shareholding; foreign shareholding; role for industrial houses and non-banking finance companies (NBFCs); and business models for the new banks. The feedback and suggestions have varied, depending on the interests they represented. For instance, industry associations and trade have favoured a higher initial capital of Rs.1,000 crore, which could be raised further over a period. Only with a large capital can the new banks invest in technology, goes their argument. The NBFCs and the microfinance institutions, on the other hand, want a lower level of capital so that more banks can be licensed in a short period.
More than every other issue, it is the possible role of industrial houses in promoting new banks that has elicited sharply contrasting responses. Banks have opposed the idea, citing, among others reasons, the less-than stellar record of big business in managing banks, a point that prompted nationalisation in 1969. In many countries, combining banking and commerce has not been a happy experience. The ownership structure of large industrial groups may open up opportunities for regulatory arbitrage. Large conglomerates will exacerbate the concentration of economic power and political influence. Some others have suggested granting licences to industrial groups but with safeguards, ranging from tight regulation to barring the promoters from having business relationship with the entities promoted by them. The feedback on the role of NBFCs shows less of discordance. One section would require the NBFCs to wind down activities that overlap with those of banks. This would eliminate the scope of regulatory arbitrage that might accrue to the lightly regulated NBFCs. Finally, many respondents who favour the entry of new banks would like them to be given general banking licences and not restricted to specific geographical area or function such as financial inclusion. Ten months after the Finance Minister mooted the idea, the subject of licensing new banks seems to be as divisive as ever, and it might take some time for specific proposals to crystallise.
