Home >industry >banking >RBI, finance ministry split wide open

Mumbai: A day after finance minister P. Chidambaram prodded the Reserve Bank of India (RBI) to speed up the process of licensing new banks, governor D. Subbarao said on Friday that the central bank would do so only after making sure that the groundwork is in place and all “enabling conditions" are met.

The RBI chief’s remarks seemed to indicate a widening divide on policy between the finance ministry and the central bank, which have also differed over the timing of interest rate cuts to prop up sagging economic growth.

“We have been preparing for launching this process (of issuing new bank licences), but all the groundwork, all the enabling conditions for launching this work have to be fulfilled," Subbarao told reporters in Pune.

RBI hasn’t licensed any new banks since 2002. On Thursday, Chidambaram said he had asked RBI to finalize the guidelines for new bank licences and start accepting applications from potential new banks without waiting for an amendment of banking rules.

The central bank has been holding out for amendments that will give it the powers to supersede boards of banks that could behave in a rogue fashion. Unless Parliament passes the amendment, RBI is unwilling to allow a new set of banks run by industrial houses that could lead to potential conflicts of interest between their banking arms and other affiliates.

“We have written to RBI recently urging them to proceed to finalize the guidelines and proceed to receive applications for new banking licences in anticipation of the amendment in the Banking Regulation Act," the finance minister said on Thursday.

“We hope that RBI will pick up the thread and finalize the guidelines and start receiving the applications," he added.

Chidambaram also said that “the power or the authority" that RBI wants is already available under other provisions of the law and the central bank’s own regulations and guidelines for handing out new banking licences.

Subbarao’s reluctance to toe the line of the finance ministry is the second instance in recent times of the central bank and the government diverging on critical policy issues.

In the second quarterly monetary policy review in October, Subbarao kept policy rates unchanged, citing high inflation, although Chidambaram had been keen that the central bank pare its policy rate to prop up economic growth.

In a bid to convince RBI about the government’s serious intent to rein in the fiscal deficit, the finance minister laid down a five-year fiscal consolidation road map a day ahead of the monetary policy review.

But the RBI governor was unmoved. While leaving interest rates unchanged, he cut the banks’ cash reserve ratio, or the portion of deposits that commercial banks need to keep with the central bank, and hinted at a rate cut only in January.

“Growth is as much a concern as inflation," a visibly upset Chidambaram said then. “The government has to walk alone to face the challenge of growth."

On Friday, Subbarao said inflation remains high, although the central bank is conscious about the economic slowdown. “At 7.45%, inflation is certainly quite high," Subbarao told reporters, adding that the central bank is always on “high alert" on the inflation front.

The passage of the amendments to the banking law has been one of the main preconditions of the central bank for handing out new bank licences to private sector companies. To push for early bank licences, the finance ministry is exploring if RBI can be empowered to supersede the boards through executive actions instead of amending the law.

“...The shape and the form of the final policy on new bank licences calls for alignment of multiple stakeholders, regulators as well as economic interests," said Monish Shah, senior director at consulting firm Deloitte Touche Tohmatsu India Pvt. Ltd.

RBI is “painfully aware of the pitfalls" in allowing industrial houses to open commercial banks, but the regulator will ensure that these entities conform with the rules, deputy governor Anand Sinha had said at an event organized by Mint in Pune in early October.

“Does that mean that we also should not allow big houses to float banks? We will certainly take a chance," he had said. “We are painfully aware of the pitfalls, but we will make sure that regulations are not subverted."

RBI will ensure that banks floated by big business houses will be at an arm’s length from their subsidiaries through amendments in the Banking Regulation Act, Sinha had said at the seminar.

RBI licensed Kotak Mahindra Bank Ltd and Yes Bank Ltd in 2002. In 1994, it opened the door for the first set of 10 new private banks, seeking to introduce greater competition in the sector. This time around, the objective is the expansion of banking services, or so-called financial inclusion. About 40% of India’s adult population does not have access to banking services as yet.

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