The Reserve Bank of India's discussion paper on entry of new banks in the private sector collates various, often conflicting, views on what is turning out to be a key aspect of banking policy and financial sector reform. It also brings up to date the central bank's thinking and international experiences with private sector banks. The Finance Minister in his budget speech, while calling upon banks to extend geographical coverage and improve access to banking services, had said that the RBI would be giving a few licences to select private sector players, including non-banking finance companies. The discussion paper, open for public debate, is a major step at framing new guidelines for entry. The recent financial sector crisis showed the private sector banks in the United States and other advanced countries in a poor light. Almost all major banks in the U.S. and a sizable number in Europe had to be baled out by governments. Prudent regulation might have saved the Indian banks from the worst consequences of the crisis, but the RBI's experience with the private sector banks since the beginning of financial reforms has not been wholly satisfactory. Out of the 10 new banks licensed under the 1993 guidelines, only the four promoted by leading institutions have flourished.

An important lesson from the experience of the 1990s is that neither a high capital adequacy requirement — of Rs.200 crore to begin with — nor advanced technology has been of particular help to many of the new entrants. The RBI has rightly chosen to address some of the key issues of bank licensing by listing out the pros and cons. On the hotly debated issue of letting leading industrial houses in, there are, to be sure, significant advantages in allowing them to run banks — among them are deep pockets and managerial ability. On the negative side, the banks might easily find ways to circumvent regulatory guidelines relating, for example, to group exposures and patronisation of promoters. Also, framing capital adequacy requirements for the new banks is not going to be easy. A higher entry level capital of Rs.1,000 crore might put off some genuine and otherwise worthy applicants but it is highly desirable in the context of the growing financing needs of the country. Non-banking finance companies seem to be the obvious candidates. They already deal with most of the banking products and are also regulated, though compared to banks they are subject to much lighter controls. It is just as well that an independent expert group is envisaged to vet and recommend eligible applications to the RBI.

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