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.
Keywords: RBI, Banking sector, D. Subbarao, Licensing of New Banks, non-banking finance companies, private sector banks
1.Banks are needed in rural areas also.
2.standards as applicable to big banks may be stringent to prevent
globally prevalent phenomenon of corruption in banking sectors and
resultant meltdowns experienced even by rich countries.
3.but what is the cost for doing the same in India?
4.the vast deserving segments of populations not served by a bank do
still get lendings from informal sector.
5.informal lenders are same high caste rich in the village who will
impoverish the borrowers and terrorize lending and borrowing by gory
examples of families commiting suicide under debt.
6.But debts of big banks will still be written off.
7.Banks or any institution must have ethics and moral standards of
functioning ensured by auditors.
8.Hope the last man in India ever finds a bank which will finance his
dream of India, or at least escapes family death by suicide by not
borrowing but still keeping his dreams alive for a next life may be on
another planet with enough morality and ethics.
Large industrial houses have had considerable influence on the government's economic
and financial policies all these years after independence. One cannot see any signs of
this situation changing. Money after all is the real power even in democracies.
Ideal situation in which regulators and supervisors can function with autonomy within the legislative mandate does not exist today. GOI through Finance Ministry has been pulling and pushing RBI ever since the idea of new bank licenses got momentum a couple of years back. RBI had limited options. One, rush through the formalities and give half a dozen bank licenses to those who could ‘manage’ them in the given dispensation. Two, go through some semblance of rational procedures and buy some time when the central bank could convince GOI about the dangers in giving banks to ‘manipulators’. Three, convince GOI that financial sector reforms and consolidation/overhaul of existing banks was a priority and no immediate purpose will be served by allowing new banks. Now, it seems RBI is going for a fourth option, namely, accept applications from all, give licenses to some under pressure, some to genuine aspirants and some others whom RBI would like to 'discipline' by converting them into banks.
There is a popular and well-tested coinage in the banking sector called 'checks and balances' which appears not to have implemented in functioning of the loss-making public sector banks which is why we see huge amount of money is injected periodically into the system in the name of revival package/ rehabilitation programme. The money so doled out comes from taxpayers' pocket. Obviously therefore the need is to take harsh measures to stop loopholes and malpractices of the erring banks. Bank nationalisation in 1969 was done to put 'inclusive banking' in place so that banking can reach the people at the furthest corner and eliminate exploitation of the moneylenders. By allowing big business houses to open new banks will endanger the whole concept of rural banking or banking for the masses. In this context, your comment, “..the question needs to be asked as to why the policy goal of greater financial inclusion cannot be pursued without inducting industrial houses” is extremely relevant.
The edit must suggest the alternative in order to take banking facilities to unbanked areas.There is not even a hint of how financial inclusion can otherwise be achieved.Writing an answer in a college exam is one thing and taking steps to providing access to financial services is another.Or you simply want the country to remain backward so that you could continue to write such pieces.One important difference between 1969 & 2013 is that RBI is far more powerful,cimbine that with the excess capacity in the rural areas requiring easily accessible credit and you have a scale of financial inclusion that only private players can fulfil.
The move to issue bank licences for private players as proposed by
RBI,has serious implications. It was during Indira Gandhi's tenure
that banks were nationalised to protect bank savings from the
defalcating private owners, who used to siphon off the reserves to
their respective companies. It was the regulation that saved the skin
of our economy during global meltdown. Instances of private corporates
gobbling up bank loans are aplenty.Mallaya is the best and worst
example. The big houses have been recorded huge defaulters in NPA. In
such a scenario, the proposal which is in the pipeline of RBI is
illadvised. Unlike the West, India's economy hinges on our domestic
savings which constitutes around 25% and this mostly oxygenates our
economic activities. The recent move of the centre to merge banks was
stoutly resisted by TUs as such mergers would only benefit defalcating
private houses, who could avail gargantuan loans from public savings.
It is time to draw lessons.
The non performing assets of Indian Banks has been increasing and can lead to a sub-prime crisis like recession in the next few years. RBI must make sure that private banks will not be entitled for any government bail outs like those of USA.
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