Forty-two years after nationalizing the nation’s major banks, India is readying to allow industrial houses to return to the banking space, which many countries across the globe are still wary of as smart corporations are capable of using money to their advantage and deny funds to competition. But if the Reserve Bank of India’s (RBI) draft licensing norms for a new set of banks are anything to go by, not too many business houses will be able to meet the fit and proper criterion.
Apart from “sound credentials”, “integrity”, “diversified ownership” and a 10-year track record, they should not have even 10% exposure to real estate and broking businesses, both in terms of income and assets in past three years to be eligible to apply. Besides, RBI will also seek inputs from enforcement and investigative agencies such as the Enforcement Directorate, the Central Bureau of Investigation, the income-tax department, et al. After all these, there will not be too many successful licence seekers.
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RBI opened doors for private firms in the banking space in 1993; in 2003, it had allowed two more to set up shop. At that time, it also raised the minimum capital requirement to float a bank from Rs 100 crore to Rs 300 crore. This time, it has been raised further to Rs 500 crore. But this is the “minimum” capital one needs to bring in and the actual capital could be much more, depending on the business plan.
There are many more critical terms that the banking regulator has attached to the licensing norms. For instance, along with their applications, the corporate houses will be required to submit their business plans and if they deviate from the plans, RBI could restrict their expansion, change management and consider other penal measures. They will also open every fourth branch in unbanked rural India to fulfil the main objective of giving licences to a new set of private banks—financial inclusion.
Another critical fact to note is, corporations will have to float a so-called non-operative holding company (NOHC) to promote the bank. This NOHC will own other financial outfits of the industrial group as well and RBI will supervise the bank, other financial firms as well as the holding company. The idea is quite simple—ring-fence an industrial house’s finance activities from corporate activities and supervise them closely to avoid any spillover into other businesses.
The holding company will own at least 40% stake in the bank for five years and foreign holding will not exceed 49% during this period. Finally, the bank will have to enter the capital market and list its shares within two years of receiving the licence.
The new banking licences will be restricted to only private entities. In other words, the likes of Life Insurance Corp. of India, Indian Post Office, Export-Import Bank of India and Rural Electrification Corp. Ltd, who have all along been harbouring the ambition of floating banks, will not be allowed to seek a licence.
This is a draft proposal, released about 18 months after finance minister Pranab Mukherjee announced the plan in his February 2010 budget.
When will we see the birth of a new bank? Suggestions and comments to the draft can be sent to RBI till 31 October, but that does not mean that final guidelines will be released by the end of this year or so. The final guidelines will only be released after “certain vital amendments” to the Banking Regulation Act are in place. The proposed amendments give RBI powers to supersede a bank’s board, which it does not enjoy now. One can’t possibly blame the banking regulator for bargaining hard with the government on this as supervising industrial houses is not an easy job.
In 1993, when India first opened up the banking sector to private firms, the objective was to infuse competition. To a large extent that has been fulfilled, as the so-called new generation private banks such as ICICI Bank Ltd, HDFC Bank Ltd and Axis Bank Ltd have forced the staid public sector banks to become more nimble-footed. But these banks have not been able to spread banking across the country as their focus has all along been on urban India. This time around, the focus is on spreading the banking service across the nation.
How many banks will India need? The draft proposal does not give any indication of that. Since about half of India’s population does not have access to banking, by simple arithmetic we need to double the number of banks. If that sounds audacious, there should be at least a dozen new banks of different shapes, sizes and business plans. By keeping the entry-level capital requirement at a “minimum” Rs 500 crore, RBI has created the environment. Even if a few of them die a premature death, RBI should not feel inhibited to experiment if it’s serious about financial inclusion.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Please email comments to firstname.lastname@example.org