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It’s not prudential to bank on discretion

Shalini Singh
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OPEN TO EXPLOITATION:Even if banking licences are not a scarce natural resource, the limited numbers attach a massive financial value to the ‘permission to operate.’ —PHOTO: AFP
OPEN TO EXPLOITATION:Even if banking licences are not a scarce natural resource, the limited numbers attach a massive financial value to the ‘permission to operate.’ —PHOTO: AFP

Following the Reserve Bank of India’s (RBI) guidelines for issuance of new bank licences, the shares of corporates like Birla, M&M, Reliance, and others surged up by eight per cent on the back of speculation that one or many of them could emerge as front runners for a coveted licence.

There is good reason for such speculation. There is a major financial value attached to the licence while the selection criterion for new banks is opaque, with a high degree of discretionary decision making. This, coupled with the RBI’s explicit communiqué that it can introduce further discretionary layers of qualifiers, even after the filing of applications, has led to the stock market backing a range of companies that have very little in common.

In the past two decades, the RBI has licensed only 12 private banks. Of a large number of applications received, 10 banks were licensed based on the January 1993 guidelines. Of these, Times Bank, Centurion Bank, Bank of Punjab and Global Trust Bank closed shop after being merged with others. The guidelines were revised in January 2001, fresh applications invited and two more licences issued. There is no transparent record available on the RBI website to tell us why the applications of some were rejected while others were approved and neither does a reading of the two sets of guidelines offer any clues as to what sets the successful licence holders apart from the others.

Vague parameters

The RBI has now released new guidelines with no indication of when the next set of banking licences will be given. It has also retained a high level of discretionary decision making — presumably to ensure non-deserving corporates are screened out — but which could well have the unintended consequence of triggering lobbying and horse-trading.

For example, under “Procedures of RBI Decisions” the guidelines state, “Licenses shall be issued on a very selective basis to those who conform to the above requirements, who have an impeccable track record and who are likely to conform to the best international and domestic standards of customer service and efficiency.” There is no qualification of how “impeccable track record” will be determined or how “best international and domestic standards of customer service and efficiency” is defined.

The applications will further be subjected to a “Fit and Proper criteria” described in para 2(b) which requires promoters to have a “past record of sound credentials and integrity.” They should be “financially sound and have a successful track record of running their businesses for at least 10 years.” Additionally, “promoters’ business model and business culture should not be misaligned with the banking model ….”

These vague parameters practically rule out any objective decision making since what is “financially sound” in one business such as eBay, may be totally unsound in another such as M&M. Similarly, “successful track record” could be defined as revenue growth, customer satisfaction, innovation, creation of shareholder value — or by any additional or all of the above parameters. Even defining “sound credentials” is virtually impossible and guaranteed to generate dissent amongst even banking experts, especially since they are judging the applicant’s existing business in which there may be no experts at all.

Another imponderable comes from the requirement of aligning “business culture” — and not business — with the “banking model.” How is culture defined and who decides whether it is aligned with banking? Will a telecom company, which has a large customer base and, therefore, experience in customer care, be more likely to get a banking licence or a petrochemicals major, which has few customers but a large turnover and varying profits?

The RBI has also reserved the right under Section 4(iii) to screen the applications and then further “apply additional criteria to determine the suitability of applications, in addition to fit and proper criteria.” In effect, the initial criteria of “Fit and Proper,” which by itself is vague by design, is to be subjected to additional discretionary decision making. This implies that after applications are received, some applications may be rejected based on specific criteria which will be unknown to all those who apply by July 4, 2013 as per the RBI’s invitation. Those specific criteria would carry applicants to a second round where a new set of criteria, which have not been designed or defined, could be applied. So not only are the rules of the game unknown, but they can be changed after the game has begun, a move which could easily violate at least a dozen Supreme Court judgments and fail the test of “legitimate expectations” and Article 14 — the touchstone of Constitutional propriety.

The RBI will release a list of applicants but does not indicate when the applications will be processed. However, it places a converse obligation on the successful applicant to begin banking within one year of receiving “in principle approval” as per Section 4(iv) of the guidelines.

Even the most basic stated public policy objective of issuing new licences to increase banking penetration and inclusivity is defined in a manner that can be negotiated, post facto — bringing in further opportunities for lobbying with everyone from babus in the financial services cell and banking operations in the Finance Ministry to the RBI itself.

Section (K) (vii), looking to advance the cause of inclusivity requires a new bank to have “at least 25 per cent of its branches in unbanked rural centers” but fails to mention by when such a huge cost exercise, which can completely alter the viability of the bank, needs to be achieved. Even the telecom licence guidelines, which according to the Comptroller and Auditor General (CAG) were manipulated by the discretionary decision making of Department of Telecommunications (DoT) officials leading to 85 ineligible applicants gaining access to spectrum, does a far better job of defining rollout in rural areas and district headquarters.

On rural banking

Lastly the guidelines require applicants under Section (F)(a) and (b) to submit “business plans” to achieve financial inclusion that should be “realistic and viable.” The RBI warns that a deviation at a later stage may invite penal measures including a change in management, etc. But unless the rural banking rollout is finely defined, the “viability” will vary in each case and it is virtually impossible to choose one application over the other, since the criteria have been kept vague in the first place. Similarly, companies can achieve “financial inclusion” in multiple ways — mobile banking or physical spaces or linking with existing rural Non-bank financial companies (NBFC) by acquiring assets for distribution. What weightage do these get? And is a physical bank more important than technological access to banking for consumers? Would a mobile operator get higher weightage since it has millions of subscribers — including rural — or will a company which makes and sells tractors through one of its subsidiaries and may have a brick and mortar presence at district and rural level? And what of someone who has neither but knows how to use these extremely well?

The RBI has further failed to define who would constitute “high level advisory committee” except as “eminent persons with experience in banking, financial sector and other relevant areas.” When will the committee be announced? And why, as the RBI claims, should the committee set up “its own procedures” for screening applications?

Shouldn’t these criteria be made known to the applicants beforehand to meet the very basic tenets of transparency and good governance? The guidelines proudly announce that “RBI decision in this regard will be final.” Not true since any government decision is open to judicial scrutiny, even if the decision is approved by the Cabinet, leave alone the “high level advisory committee.” And what of influence peddling by lobbying corporates, former bureaucrats (looking to be incorporated as independent board members) and other political influence peddlers — in an election year? The RBI’s decision could well be final, but would it be transparent and well defined?

Coming in the backdrop of the 2G spectrum scam, which was the outcome of a clearly stated and far more detailed set of guidelines than what the RBI has released after three years of consultation, one can only infer that the central bank has either learnt nothing from the unfolding and explosive governance challenges in India or it somehow believes that its reputation and influence over large corporates through the banking relationships that it oversees will force unsuccessful applicants to remain silent even if they have been dealt with unjustly.

Even if banking licences are not a scarce natural resource, the limited numbers attach a massive financial value to the “permission to operate.” There is, therefore, every reason for corporates to exploit those portions of the decision-making procedure that are open to discretion, influence and interpretation.

shalini.s@thehindu.co.in

The RBI’s licensing guidelines for private banks may open the door to influence peddling and corporate lobbying


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