After interest rates, the licensing of new commercial banks has become the latest issue on which the Central government and the Reserve Bank of India can’t seem to see eye to eye. According to reports, Finance Minister P. Chidambaram has asked the RBI to expedite the process of issuing new commercial bank licences by first finalising existing draft guidelines, as a prelude to receiving new applications. The RBI, on its part, does not want to move forward unless it is legally empowered to regulate the new entities more comprehensively than is possible now. That would include powers to supersede the boards of directors of recalcitrant banks if the need arises. Existing regulations, in the RBI’s view, are not sufficient to check possible violations by banks promoted by those for whom banking may not be the core or even the main business. A specific concern has been the need to ensure that promoter groups are kept at arm’s length from the new banks. The failure by big business houses to adhere to this basic principle with regard to banks in which they were major shareholders was one of the principal reasons behind Indira Gandhi’s bank nationalisation drive in 1969. Since then, the door has been shut for them. Even with the onset of liberalisation, while new private banks have come into being, none of them has had any connection with industrial houses.
In his 2010 budget speech, Pranab Mukherjee, who was Finance Minister at the time, announced that industrial houses, among others, would be allowed to start private banks. His proposal, predictably, caused a raging, if inconclusive debate, over the desirability of the move. The RBI circulated a discussion paper in August 2010 detailing the pros and cons and released draft guidelines a year later based on the feedback received. The minimum capital requirement is pegged at Rs 500 crore. To be eligible, promoters must have diversified ownership, sound credentials and integrity and a successful track record of at least 10 years. These and other criteria are meant to raise entry barriers. However, there are two sets of objections to letting industrial houses in even after the regulatory lacunae are plugged. The first arises out of a genuine apprehension that large industrial houses, already entrenched in several spheres of the financial sector, might, after getting a bank licence, indulge in regulatory arbitrage and even attempt regulatory capture. There is, besides, no reason to fundamentally alter the ownership structure of Indian banking by letting big business groups in. With the right policy measures and incentives, existing banks will be able to better achieve objectives such as financial inclusion.
Already there are too many bank branches in metros and big-urban centres. With the granting of license to industrial houses, they will be concentrating more on the cities only.
RBI / GoI can stipulate that the new banks that may be given license to start a bank SHOULD open atleast 3 branches in rural and remote areas for every metro/urban branch they open.
Also it should be stipulated that the priority sector norms should be followed if necessary with 50% target.
Statutory bodies like RBI should not be made subservient to the whims and fancies of officials in ministries for exercising the powers they are expected to exercise as part of their mandated functions. RBI has faced problems on such issues relating to banks earlier due to blurred clarity in powers and interpretation of law. Perhaps, RBI has learnt from the recent experiences while handling new generation private sector banks which did not survive and the interests of the clientele had to be protected by the regulator with GOI support.
Last ten years or so, RBI has been loitering around North Block for permission to continue a pension updation granted by RBI in exercise of powers available under Reserve Bank of India Pension Regulations which is being questioned by finance ministry which has interpreted the pension regulations differently. An amendment to RBI Pension Regulations made to conform to the GOI interpretation of the regulations is pending with finance ministry.
The basic reason behind to give banking license to industrial houses
is need of financial inclusion. It is true that historically
industrial houses have the tendency to influence and manipulate the
regulatory authority. They try to secure their vested interest.
Hence, government should give more regulatory power to RBI so that
new banks works on sound banking principles.Financial inclusion is
need of the hour and hence new banking licences should be given but
with adequate safeguard.
Nice article. Licensing of new commercial banks should be done as
liberalization of banking sector is the need of the hour.But Proper
guidelines and strict eligibility conditions should be put in place.
As banks are the heart of any economy , it should be sound and
reliable. Consumer interest must be given priority than promoters by
putting a sound verification and audit procedure.
With zero percent interest rate from FED (US Central Bank)and
other central banks, printed exclusively for the MNC bankers. Our
government wants the free flow of that paper money by issuing new
banking licences, looks like a collusion between central bankers,
politicians, investment bankers and industrial houses. With
already artificially propped up real estate and other commodities
prices, inflation at all time highs, job cuts and unemployment.
99.9 percent of people don't benefit from these rock bottom
interest rates, cause they still have to shell out ten percent and
above interest rates for their loan, the world economy is going
through a ill conceived monitory policy, rather than common
citizens benefiting from this rock bottom interest rates, its the
top bankers,rich with connections, industrial houses, crony big
wigs who are enjoying this financial bonanza.
In this age of crony capitalism, the Congress seems loath to have
independent regulators with any sort of teeth.
already our politicians are holding a large chunk of shares in the existing new gen pvt sector banks. If RBI is given pressure to liberalize issuing new banking licence to industrial houses , it is the politicians who are going to have merry.
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