RBI bank licence discussion paper welcome move: Consultancies

The Reserve Bank's discussion paper on granting licences for new banks in the private sector has elicited a favourable reaction from global consultants, even as they termed the proposal for diluting the cap on foreign direct investment in private lenders as negative.

"The discussion paper is a comprehensive one and takes into account all issues. It has also relied on internationally accepted norms while formulating various ideas," KPMG Financial Services Tax Leader Punit Shah told PTI.

He said the central bank's paper takes stock of all relevant points, including promoters' shareholding, minimum capital requirements, allowing non-banking financial companies and industrial and business houses into the banking segment and foreign direct investment.

Commenting on the paper, Ernst & Young India Director Viren Mehta said: "The discussion paper is in a right direction and a lot of work has been put into it, including a comparable analysis with foreign countries. It is a constructive exercise."

The firms were, however, against the proposal to reduce the limit of FDI in private banks to below 50 per cent from the current 74 per cent. "The discussion paper's proposal on FDI in the banking sector is surprising. It is an incorrect view. There is already 74 per cent FDI limit on banking. What is the need for bringing it to below 50 per cent," Shah said.

A similar view was echoed by Mehta, who said the present limit of 74 per cent should be maintained.

The consultancies said the proposal to allow NBFCs and industrial and business houses into the banking sector would increase competition and help in the process of financial inclusion by making use of their good capital base and strong risk management teams.

"NBFCs in the banking sector will help in furthering the process of social inclusion at a time when a huge segment of the population is outside the banking sector. Having new players like NBFCs and industrial houses will also increase competition," PWC Associate Director Robin Roy said.

At the same time, the agencies stressed upon having a strong regulatory mechanism to ensure that industrial houses with big capital accounts do not misuse their position.

Regarding the proposal to increase the minimum capital requirement for entities to set up banks to Rs 1,000 crore from the existing Rs 300 crore, consultancies said such a step will not hinder the development of the banking sector.

"As for the minimum capital requirement, we think an amount of Rs 1,000 crore could be used as threshold. Another option would be to have a starting threshold of Rs 500 crore, which is then gradually increased to Rs 2,000 crore over two-three years," Shah said.

Asked about the limit for promoters' holdings in new private banks, he said: "Having a 40 per cent stake to begin with for promoters is reasonable and it could then be diluted to around 25 per cent with the passage of time."