The Reserve Bank of India’s guidelines for setting up new private sector banks come three years after the then Finance Minister, Pranab Mukherjee, in his 2010-11 budget speech, expressed the government’s intention to award a few new bank licences to private players, including industrial houses. The RBI proceeded step by step, circulating a discussion paper, and inviting stakeholders to share their views. Last August, it issued a set of draft guidelines. Even at that late stage, it was common knowledge that the government’s enthusiasm to induct private players was not shared by the RBI, which has had especially serious reservations over the possible entry of industrial conglomerates. Though the central bank sought for and subsequently obtained legislative powers to more effectively supervise banks and supersede their boards of directors if need be, the controversy over the possible entry of conglomerates remained. Viewed from many standpoints, this apprehension is justified. One of the reasons major private banks were taken over in 1969 was because their managements were found cosying up to their industrialist-owners. More recently, in the 1990s, the experiment of inducting a few “new generation” private banks was only partially successful. Although all the new banks met the regulatory criteria relating to capital and technology among others, only a few have flourished, almost certainly due to their excellent pedigree. The weaker ones have merged with the stronger banks and one high flier, the Global Trust Bank, had to be rescued by the public sector Oriental Bank of Commerce.

The point is that no matter how stiff the entry barriers appear to be, it is impossible to weed out undesirable applicants. For all the precautions that are to be taken before awarding the licences — the RBI has proposed a scrutiny of short-listed applicants by outside experts — the subjective element cannot be eliminated altogether. At the present juncture, the scope for applicants to use political connections to influence the process is real. Curiously, in a departure from the earlier draft, the final guidelines do not prevent real estate companies and brokerages from applying. In all likelihood, some of those queuing up to open their own banks will indeed be from these speculative sectors. The wisdom of lowering one’s guard is not at all clear. It is not wise to ignore the numerous warnings on opening up the banking sector to conglomerates. The IMF has, in a recent report, pointed out that the risks of inviting conglomerates outweigh the possible benefits from the new banks. Finally, the question needs to be asked as to why the policy goal of greater financial inclusion cannot be pursued without inducting industrial houses.

More In: Editorial | Opinion