“The Reserve Bank of India (RBI)
is painfully aware of the pitfalls in allowing industrial houses to float
commercial banks…Does that mean that we shouldn’t allow big houses to float
banks? We will certainly take a chance…We will make sure that regulations are
not subverted.”
These words of RBI deputy
governor Anand Sinha, at a seminar in Pune last week, make two points. One, RBI
is extremely reluctant to allow industrial houses to set up banks. And, two,
despite its reservations, it will allow some of the “fit and proper” industrial
houses an entry into banking.
As a principle, the Indian
banking regulator was not in favour of opening up the sector till February
2010, when former finance minister Pranab Mukherjee announced that a new set of
private firms would be allowed to set up banks. RBI was, in fact, in favour of
consolidation in the sector. After the budget announcement, the central bank
got into action, but with reluctance. Which is why it took so long to prepare
the draft licensing norms and, more than a year after the release of the draft
norms, there is no sight of the final licensing norms.
The reason behind this is well
known. RBI wants the power to supersede the board of a rogue bank and this can
be done by amending the Banking Regulation Act of 1949. Unless Parliament gives
its nod to the amendment, RBI is unwilling to bet on a new set of banks run by
industrial houses.
With the finance ministry’s
intervention, it seems the impasse is being broken. RBI is now exploring legal
ways of empowering itself to supersede a bank’s board in the licensing norms
itself. If indeed that happens, we may see the final guidelines on new bank
licensing before the end of the calendar year.
Almost two years after the P.V.
Narasimha Rao government liberalized India’s economy, on 22 January 1993, RBI
issued the first guidelines on the entry of new private banks. For well over
two decades, since the nationalization of 14 large banks in 1969, followed by
another seven in 1980, no private bank had been allowed to establish shop. Over
this period, public sector banks expanded their networks extensively, adding
numerous branches, often in remote areas at the behest of political bosses and
catering to the socioeconomic needs of the masses in a highly regulated
industry where the central bank dictated interest rates and directed credit
flow.
“A stage has now been reached
when new private sector banks may be allowed to be set up,” the central bank
said in its historic declaration. RBI’s objective was to introduce competition
in the sector and force banks to be efficient and more productive. Its
guidelines made it clear that allowing the entry of private banks was a part of
the financial sector reforms to provide competitive, efficient and low-cost
financial intermediation through the use of technology. The new banks were to
have at least `100 crore of capital and their shares had to be listed on the
stock exchanges.
RBI received 113 applications,
many of these from large industrial houses. It asked noted economist-bureaucrat
Sharad Marathe, the first chairman of Industrial Development Bank of India
(IDBI ), to review the applications. Roughly one in every 11 applicants was
given a licence—making it 10 overall, including Development Credit Bank Ltd, an
old cooperative bank that was allowed to convert itself into a full-fledged
commercial bank.
Four of the new entrants were
floated by established financial institutions. They are Housing Development
Finance Corp. Ltd, India’s oldest mortgage lender; development financial
institutions Industrial Credit and Investment Corp. of India Ltd (ICICI) and
IDBI; and the nation’s oldest mutual fund, Unit Trust of India (UTI), which
teamed up with state-run life insurance behemoth Life Insurance Corp. of India.
Certain finance professionals
were also given licences to set up banks. Former Vysya Bank chief Ramesh Gelli
got the nod to set up Global Trust Bank Ltd; Darshanjit Singh, son of Inderjit
Singh, former chairman of Punjab and Sind Bank, for Bank of Punjab Ltd; and
Devendra Ahuja of non-banking finance company 20th Century Finance Corp. Ltd
for Centurion Bank Ltd.
Even though industrial houses
were forbidden to float banks, two of them got the nod! A few group firms of
the Hindujas got a licence for IndusInd Bank Ltd and the Jains of Bennett,
Coleman and Co. Ltd, which runs India’s largest media house and publishes the
Times of India newspaper, got a licence for Times Bank Ltd.The publications of HT Media Ltd, compete with those of Bennett, Coleman and Co. Subsequently, Kotak Mahindra Bank
Ltd and Yes Bank Ltd were given the nod in 2003-04. The requirement for initial
capital was raised to `300 crore.
When the sector was liberalized
in 1993, RBI wanted to infuse competition and raise efficiency and
productivity. This time around, the purpose is expanding the reach of banking
services, or the so-called financial inclusion. About 43% of India’s population
still does not have access to banking services. This can be done two ways.
Technology is key to the expansion of a bank’s reach and big business houses
with deep pockets can adopt the right technology. The other model could be
allowing relatively smaller banks (with smaller capital bases) to operate in
different regions. Once they do well, they can be allowed to expand after
infusion of more capital. All small banks may not survive but they can always
be merged with relatively stronger peers. Four of the 10 banks that were given
licences in 1993 did not survive.
RBI may find this idea too
radical. Besides, supervision of different types of banks is not easy. But one
thing is for sure that banking licence should be on tap and the “fit and
proper” entities should be continuously allowed to set up banks. We need many
of them. RBI follows the same rule for foreign banks.
Livemint / 15 Oct / 12
Ozg Bank License Consultant
Phone # 0091-9811415831-37-61-72-84-92-94
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Email: banking.consultant@ozg.co.in
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