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RBI, ministry differ on FDI limit, capital in new banks

RBI, ministry differ on FDI limit, capital in new banks

Mumbai: The Reserve Bank of India (RBI) wants the minimum capital requirement for new private banks set at 1,000 crore, but the government wants the amount that promoters bring in as equity pegged at half that, two persons familiar with the development said.

This is not the only bone of contention between the two. They also differ on the foreign direct investment (FDI) limit in new banks.

While the central bank wants to cap it at 49% in the initial stage, the finance ministry is not averse to the idea of 74% FDI in such banks even at an early stage.

RBI posted a discussion paper on its website in August, inviting comments from the public on the entry of new banks.

Finance minister Pranab Mukherjee had announced in his February 2010 budget that more private sector banks would be allowed in pursuit of financial inclusion or the spread of banking services across the nation.

Ahead of the February 2011 budget, RBI had sent the ministry a draft of the licensing norms for new banks. But the unresolved differences between the ministry and the government over the proposal have blocked progress.

The finance ministry has, meanwhile, appointed audit and consulting firm Ernst and Young Pvt. Ltd (E&Y) to assess the impact of the entry of a new set of banks run by private firms on the existing ones, the likely eligibility criteria, and assess potential challenges.

According to one person, the government is also in dialogue with a few other consultants, including Deloitte Touche Tohmatsu India Pvt. Ltd.

An E&Y spokeswoman confirmed that it has been asked by the ministry to submit a paper on the subject, but declined to give further details.

Deloitte declined to comment.

An email sent to RBI remained unanswered.

RBI has written to the finance ministry, asking it to reconsider the preference for lower entry capital.

It is insisting on the higher figure capital as a lower amount may encourage non-serious participants to enter the space and that, in turn, may pose a threat to financial stability.

“RBI wants it at 1,000 crore, but the government is insisting (on) a lower minimum capital," one of the two persons said. “There are stark differences regarding the FDI limit in the new banks at the initial stage."

Neither of the two persons was willing to be identified because of the sensitivity of the issue.

“Keeping 1,000 crore as minimum capital is critical in the current scenario. In the absence of this, any non-serious player who can manage 500 crore will be eligible to stake a claim for setting up a new bank. Such banks can put the deposits of the public at stake," said Santosh Singh, analyst with brokerage Espirito Santo.

RBI’s draft licensing norms would allow big industrial houses to set up banks, provided the regulator enjoyed the power to supersede the board in case of mismanagement. The banking Act is being amended to give RBI such powers.

Any industrial group that is being probed by investigating agencies for any alleged misconduct in any sphere of business is, however, unlikely to be considered for floating a bank.

Also, going by the August discussion paper of RBI, licences will not be awarded to firms engaged in real estate activities and the draft licensing norms—being discussed with the ministry and not placed in the public domain as yet—also reiterated this stance.

A number of business groups have already expressed interest in applying for banking licences once the regulator finalizes its guidelines. These include the Anil Ambani-led Reliance Group, the Aditya Birla Group, the Religare group, Shriram Capital Ltd and the Muthoot Group.

Currently, the Indian banking sector has 81 commercial banks with total assets of around 60 trillion. Out of this, 27 are owned by the government, 22 are private sector banks and 32 are foreign banks.

The Indian banking regulator has been conservative in allowing new banks and had been pushing for consolidation until Mukherjee’s announcement in the 2010 budget speech.

The last time RBI issued banking licences was in 2004, when it granted licences to Yes Bank Ltd and Kotak Mahindra Bank Ltd.

In May, an RBI working group proposed that all large financial groups should function under a holding company, which will be regulated by it even if these groups do not have a bank in the fold.

Also, a separate legislation should be formed to regulate such holding companies, the working group said.

Saurabh Tripathi, partner and director at Boston Consulting Group, said separate rules for new banks may result in skewing the system.

“There should be consistency in terms of the norms for both existing and old players, especially in matters related to the foreign holding and the number of branches required in rural areas," he said. “If there is a different set of rules for new banks, there will not be a level playing filed, which could put some players at a disadvantage."


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