Will banking dreams of corporates under probe be scuttled?

Will corporate houses probed by federal agencies be eligible for banking licenses under RBI's 'fit and proper' criteria?

The past week has put the ugly side of business back into the spotlight, with the who’s who of corporate India coming under the scanner of the CBI and courts in the infamous Coalgate and Radiagate scandals. While there is a sharp divide on the veracity and merit of the allegations made by investigators - with India Inc. accusing the government and its agencies of vitiating the already sullied business environment on one hand, and critics of big business alleging this to be a fallout of rampant crony capitalism on the other, the consequences, either which ways, are not enviable. 

 

With agencies now going after business houses with a vengeance - what many are calling a witch hunt of sorts, even honest bureaucrats are scared stiff to take any decision. So will this growing vigilante atmosphere also make the job of the RBI, which is all set to give out new bank licenses to corporate houses, much tougher than anticipated? 
 

26 players including arms of conglomerates such as L&T Finance, Aditya Birla Nuvo, Reliance Capital, Bajaj Finserv, Tata Sons, Indiabulls among others applied for bank licenses recently. But parent companies of at least 3 of these applicants are facing serious probes by investigating agencies like the CBI and SFIO for being party to high profile scams like 2G and Coalgate. 

 

While no convictions have happened till date, how will the Reserve Bank assess the eligibility of those under the scanner?
 

Under its ‘Fit and Proper’ criteria the RBI proposes to evaluate the status of applicants on the basis of many counts including by seeking feedback on applicant Groups from “regulators, and enforcement and investigative agencies like Income Tax, CBI, Enforcement Directorate, etc. as deemed appropriate.” 
 

The question is, will this evaluation methodology scuttle the chances of some of India’s biggest business houses like the Tata Group, ADAG and the Birlas? Experts that Business Standard spoke to refused to comment on individual cases, but said the RBI’s larger goal of getting corporate houses to set up banks is unlikely to be affected by the recent headlines. 

“The RBI is a highly professional agency and they will examine the matter of bank licenses on the basis of the first principal” said banker Meera Sanyal – Country Head, RBS India. 
 

“The ‘fit and proper’ criteria are not a black box” said Shinjini Kumar, Executive Director at PricewaterhouseCoopers. “Post 2005, there has been enough experience in the system to understand what is intended to be applied here - the highest standard of governance that ought to be expected from an owner or manager of a bank.” 
 

The moot point is who decides what ‘highest standard of governance’ is? The RBI and the CBI may end up differing on the matter even after the consultative process, in which case will the central bank take a discretionary decision that could come under the investigative agency’s scrutiny sometime in the future? 
 

A certain element of discretion will have to be exercised say experts. “A bank license is certainly not a commodity that can be auctioned to the highest or the earliest bidder. The vigilante elements can complain and split hair, but the banking system of this country is well regulated and governed and stalling all decisions because of the fear of public trials will be unfortunate” Kumar insists. 
 

But the RBI is evidently going to have to walk the tight rope. Reports suggest, the parliamentary panel last month had opposed giving new bank licenses to corporate houses, raising concerns over the ambiguity of the ‘fit and proper’ criteria and saying too much discretionary power vested with the RBI. An external committee headed by former RBI Governor Bimal Jalan, has been set up to scrutinize the current applications and new licenses are expected to be issued early next year. How much credence the committee gives to the spate of new FIRs and enquiries against top corporates, will determine whether or not they get  licences to operate new banks in the country.