Almost two months after finance minister Pranab Mukherjee announced that the Reserve Bank of India (RBI) was considering additional banking licences to private players and non-banking financial companies, the central bank in its annual monetary policy last week proposed to prepare a discussion paper and place it on its website by end-July. Based on the feedback, the guidelines will be finalized and all applications for bank licences will be referred to an external expert group for scrutiny.
In the past, too, the central bank had formed an independent advisory panel to vet proposals—but why would it need to wait for the annual monetary policy platform to announce this? Clearly, it’s not in a hurry to welcome new players and wants to involve others in sharing the responsibility of choosing the right candidates.
Illustration: Jayachandran / Mint
The performance of the new private banks has been a mixed bag. Twelve banks were given licences in two phases in 1994-95 and 2003. Of the 12, four have been merged with others for reasons ranging from inability to build scale to misadventure in the stock market. One financial institution-promoted bank has got merged with the parent while three others of such pedigree are doing fine, better than the rest.
The first set of new banks needed Rs100 crore as minimum paid-up capital and this was raised to Rs300 crore for the second set. Large industrial houses continue to be barred from promoting banks, but individual companies connected with such houses were allowed to hold up to 10% equity stake in guidelines revised for the second set of new banks, provided the bank maintains an arm’s length relationship with business entities in the promoter group.
The two sets of new private banks definitely infused competition and helped change the staid state-run banking industry that accounts for around 70% of banking assets—but they have not been able to spread the message of financial inclusion. With 50% of India’s population without any access to banking services, we need more banks. Also, the new players must have financial muscle to meet the growing credit demand of corporations and individuals.
With remarkable improvement in supervision and regulatory coordination in past two decades, RBI should not feel shy of allowing big houses to set up new banks. Of course, the prospective players must meet the fit and proper criterion with an impeccable track record and should be willing to put in hefty equity, much more than Rs300 crore, to demonstrate their seriousness. The other option could be opening the sector for foreign banks.
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