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Banking licences: Ministry, RBI step up shadow-boxing

Regulator wants all eligible applicants to get licences, finance ministry says not a good idea

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The central bank seems to be in an unusually generous mood on new banking licences. In a sharp departure from its earlier cautious stance, the (RBI) is now in favour of giving to all the applicants that meet the eligibility criteria mentioned in the guidelines issued for this purpose.

But, the finance ministry is not in sync with RBI’s generosity on the ground that it would be difficult to regulate and supervise a large number of banks. This new round of difference of opinion would extend the long wait for the banking hopefuls.

LICENSING NORMS IN THE WORKS

1993: First guidelines since the financial sector reforms of the early 1990s released for new banks

2001: Revised norms released, two banks given permission in 2003-04

Feb 2009: Finance Minister says in Budget speech RBI to consider giving licences to new entities

Aug 2010: Discussion paper on new bank licences released

Aug 2011: Draft guidelines on new bank licences out

RBI’s approach so far has been to restrict licences to only a few entities. According to central bank sources, the banking regulator has written to the finance ministry that banking licences should be given to all those entities that meet the ‘fit and proper criteria’ mentioned in the guidelines.

More importantly, the view in Mint Road is some of these banks can be allowed to fail. This is significant, as no banks have been allowed to fail in the country since the guidelines of 1993. “If some banks are allowed to fail, others will be more cautious and prudent in their operations,” said a person close to the developments.

RBI has always followed an ultra-cautious approach on private bank licences. Since the financial sector reform in the early 1990s, the first set of guidelines was issued in 1993 and then revised in 2001. The 2001 guidelines were cautious and large industrial houses were not permitted to set up banks. Ten new banks were set up in the private sector after the 1993 guidelines and two after the 2001 guidelines.

Sources said the ghost of the played a big role in the central bank’s decision, as RBI wanted to minimise the role of subjectivity. The central bank is now open to the idea to allowing large business houses in banking. Almost all the big industrial houses, including the Tata Group, the and RADAG groups, are keen to set up banks.

Nearly 18 months after the government announced RBI would consider issuing fresh banking licences, in August last year, draft norms were issued.

Among the criteria suggested in the draft norms was diversified ownership of promoters with a minimum 10 years of experience in business and a minimum Rs 500-crore capital. It was also said firms having 10 per cent of their income from real estate and broking activity would not be considered.

RBI has also made a case to the government to amend the Banking Laws (Amendment) Bill, introduced in Parliament in March last year, which will give more power to it before fresh banking licences are issued. At present, RBI does not have certain powers, such as supersession of bank boards.

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