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.


Where caution is welcomeNovember 26, 2012

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