Financial inclusion has been the priority of the government since quite some time. In order to achieve its target of total financial inclusion in the country by March 2011, the government has been adopting several steps. Amongst them was the proposal given by Finance Minister, Pranab Mukherjee during Budget 2010-11 that new banking licenses be granted to eligible corporates and non banking financial companies (NBFCs). Banking regulator, Reserve Bank of India has been working on the issue for some time and has come up with draft guidelines for issuing fresh banking licenses. The fact that the level of regulation is quite less for NBFCs than banks might pose an issue for these companies in getting a bank license.
Adequate capital requirement is likely to be an important criterion to be eligible for obtaining a banking license. This is because an entity with strong capital base can aid better to the goal of financial inclusion. If that be the case, then corporate houses stand a fair chance of getting selected in the race. But a key disadvantage associated with handing a license to Corporates lies in the fact that they might get biased towards their respective associate companies and subsidiary units and gives lesser priority to other clients and in times of crisis it can quickly increase the amount of bad loans. This disadvantage cannot be seriously overstated enough as it is believed that the presence of large Corporate-owned banks was one of the key reasons for the Asian Financial Crisis of 1997. Indeed the RBI has long been opposed to the idea of corporate owning banks, a policy it has completely reversed this year as a result of the Finance Minister’s announcement. It is believed that, as a result, the biggest corporate houses in the country like Reliance, Tata Group and AV Birla Group are all eying the lucrative possibility of starting their own banks.
So is the RBI undertaking sufficient precautions after taking cues from the experiences of other countries while drafting the policies for new private bank licenses? The draft discussion paper released in August this year suggests that RBI is indeed undertaking an extensive study of all the different issues involved. It has justified the rationale for simplifying the issue of bank licenses by stating that, “a larger number of banks would foster greater competition, and thereby reduce costs, and improve the quality of service.” On the other hand it has also suggested, quite rightly, that if corporate houses are to be given licences, there has to be amendments to various statutes and acts. There are several deep rooted fears in allowing industrial and business houses to own banks, the paper said. Conflict of interest, concentration of economic power, likely political affiliations and potential for regulatory capture were some of the concerns listed by the RBI. “When banks are flush with liquidity, there is a great risk of diverting the funds to liquidity constrained operations of the group,” the paper said. Further, the paper has said that companies and even non-banking financial entities directly or indirectly involved in real estate should not be allowed to promote banks. As an intermediate step, however the paper suggested that, industrial and business houses could be allowed to take over regional rural banks.
The RBI has invited suggestions from banks, non-banking financial institutions, industrial houses, other institutions and the public at large on six aspects.These are: minimum capital requirements for new banks and promoters contribution (net worth of Rs 500 crore or Rs 1,000 crore), minimum and maximum caps on promoter shareholding and other shareholders, foreign shareholding in the new banks (50%), whether industrial and business houses could be allowed to promote banks, should non-banking financial companies be allowed conversion into banks or to promote a bank and business model for the new banks.RBI listed three options, namely having a low minimum capital requirement but above Rs 300 crore, a minimum requirement of Rs 1,000 crores, and that of Rs 500 croreswith a condition to raise the amount to Rs 1,000 crores within five years. Suggestions were accepted till September 30 and now the Central Bank is working on the Final Guidelines after going through the feedback.
There is one aspect that the paper is however clear on- that companies with real-estate linkages should not be allowed to set up banks. The RBI has said that it fears for financial stability if an industrial house that is involved in real-estate also establishes a bank. The regulator stated that given the sensitivity of the real-estate sector, any sub-version of the Chinese wall between the bank and rest of the group could have extremely negative consequences for financial stability. Individual promoters are also unlikely to get another shot at what’s a lucrative business since their past performances have been far from satisfactory as seen from the failures of banks like Global Trust Bank.
While this is expected to be a long drawn-out process, it is expected that the tight licensing regime is now irrevocably changing for the better and the customers- i.e. the people of India will be hugely benefited if the process is carried out right.
Written By:
Arka Khasnabis
MBA (IB) 2009-11
IIFT Kolkata
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