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Why the delay in new bank licence norms?

Why the delay in new bank licence norms?
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First Published: Wed, May 25 2011. 01 15 AM IST
Updated: Sat, Jul 02 2011. 01 42 PM IST
India’s banking regulator is yet to release draft guidelines on licensing norms for new banks. Finance minister Pranab Mukherjee first announced the government’s intention to allow a set of private firms in the banking space in his February 2010 budget speech, surprising the Reserve Bank of India (RBI), which was till such time pushing for consolidation in banking. More than a year later, there is no sign of the draft rules even after Mukherjee said in this year’s budget speech that RBI would issue guidelines on new banking licences by 31 March.
This has not happened because the finance ministry is not happy with the draft prepared by the central bank. It wants too many changes.
RBI first prepared a discussion paper on the subject in August and sent the first draft guidelines to the ministry ahead of this year’s budget. But the ministry has not cleared the guidelines yet. It is pushing hard for the regulator to make some changes—big and small—and RBI is willing to accommodate some but not all. We don’t know when the regulator will be in a position to release the draft guidelines.
Let’s take a look at the suggestions of RBI. I have not reviewed the draft guidelines prepared by the central bank, but from various sources who have direct and indirect knowledge of what it contains, I understand that RBI is ready to allow big industrial houses to set up banks if it gets the power to supersede boards of banks that are not being run properly.
It also wants the right to oversee the operations of the promoting company and any affiliates that will have business relationships with the bank. This is being done through an amendment of the Act that governs banking in India. Mukherjee in his February 2011 budget speech promised the changes in the Act, and the proposed amendment to the Act was tabled in Parliament during the budget session itself.
Currently, RBI does not have the power to dismiss a bank board, but under section 45 of the Banking Regulation Act, 1949, it can force the amalgamation or merger of a bank with another, and force a reconstruction of the board to protect the interests of depositors, shareholders and employees.
RBI is also in favour of an industrial group setting up a holding company to own the bank and other financial services companies of the group, keeping the manufacturing and trading business out of it. This will help the Indian central bank regulate the group better. The so-called wholly-owned non-operative holding company, according to the draft, should be registered with RBI as a finance firm and governed by a separate set of prudential guidelines.
Those industrial groups that will be allowed to set up banks will have strict restrictions on exposures to other group firms. The regulator is not comfortable giving a licence to any industrial group that gets 10% of its income from real estate or the broking business.
The minimum capital a new bank would need is pegged at Rs 500 crore, and the RBI paper that is lying with the finance ministry also insists that the new banks need to be listed within the first few years. Among other things, the draft guidelines outline how much the foreign shareholding should be in a new bank, and how fast the promoter needs to pare its stake from 40% to 15%, and says rural branches should constitute one-fourth of the branch network to ensure the spread of banking services.
Although the new private banks that have been functioning are required to have at least 25% of their branch network in rural and semi-urban India, most have focused only on semi-urban centres and have ignored rural India. This time around, RBI does not want to take any chance, and it wants the new banks that will be given licences to spread banking services in even remote and thinly populated villages.
I am told that the finance ministry is not comfortable with RBI’s suggestions on paring the promoter’s stake within the first few years as well as capping the foreign stake. It also does not want RBI to be bluntly saying that no industrial house with exposure to the real estate sector will be allowed to set up banks, even though it appreciates the spirit behind it. Similarly, it is not very excited about the central bank’s insistence on rural banking and tough talk on superseding bank boards.
I don’t know when the finance ministry will finally give its green signal. After its nod—and necessary changes—RBI will release the draft guidelines, seeking public comments. It will take a few months more to prepare the final guidelines. And all applications seeking banking licences will be examined by an external group before RBI considers them. I will not be surprised if we hear Mukherjee in his February 2012 budget speech reiterating his commitment to allow new private companies to establish banks.
What is not clear is: why did RBI have to send the draft guidelines to the finance ministry? After all, it’s a mere draft, and it will be finalized only after receiving comments and feedback from various quarters. Couldn’t RBI have gone ahead with the draft guidelines and taken into consideration the government’s feedback before finalizing it?
There are various theories doing the rounds. One is the regulator’s reluctance to be solely responsible for drafting the guidelines for the most critical segment of the financial segment when the second-generation spectrum licensing scam is emerging as the largest political corruption case in India. For the same reason, the government also is not in a hurry to push new banking licences, many in Delhi say. The delay, it seems, is deliberate, and neither the government nor RBI is too keen to welcome a new set of private banks in a hurry.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Please email your comments to bankerstrust@livemint.com
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First Published: Wed, May 25 2011. 01 15 AM IST