FinMin favours real estate, broking firms to set up banks

The Finance Ministry has expressed the view that the Reserve Bank should allow real estate companies and broking firms to set up banks as adequate safeguards will be there to prevent exposure of promoters to related entities.

In its comments to RBI on the giving out new bank licences, the ministry has said that such entities can be allowed, but there should be complete ban on taking exposure in the group companies or entities related to promoters, sources said.

Even the vendor and large customers of such promoters can't get loan from the new bank, sources said, adding that this move will minimise accumulation of risk.

So, the firewall has been proposed to avoid undue influence of bank CEO to lend to the group companies, they added.

As per the RBI's draft norms for licensing of new banks in the private sector released in 2011, "entities or groups having significant (10% or more) income or assets or both from real estate construction and or broking activities individually or taken together in the last three years will not be eligible".

Explaining rationale for not permitting such entities, the RBI's draft guidelines said, there are certain activities, such as real estate and capital market activities, in particular broking activities which, apart from being inherently riskier, represent a business model and business culture which are quite misaligned with a banking model.

Post-crisis, it said, there are concerted moves even internationally to separate banking from proprietary trading.

"More importantly, in India, past experience with brokers on the boards of banks has not been satisfactory. It will therefore be necessary to ensure that any entity/ group undertaking such activities on a significant scale is not considered for a bank licence," the guidelines added.

The Finance Ministry has also suggested that the Non- Operative Holding Company (NOHC) may be substituted by the Non-Operative Financial Holding Company (NOFHC) to signify that only financial sector entities are part of the NOFHC.

RBI will regulated financial holding company and different entities under the holding company will be regulated as per the business they carry out, sources said.

In its recommendations, the ministry has also proposed to lift the ban on setting up of new financial services entities under the NOFHC for at least three years from the date of commencement.

It has also favoured RBI's proposal of opening 25% of branches in unbanked areas of the country.

"The bank shall open at least 25% of its branches in unbanked rural centres (population up to 9,999 as per 2001 census) to avoid over concentration of their branches in metropolitan areas and cities which are already having adequate banking presence," the draft guidelines had said.