'Welcome surprise from the bank regulator'

COMMENT: Ashvin Parekh

The RBI discussion paper on ‘Entry of New Banks in the Private Sector’ has been a pleasant deviation from the existing norms. The regulator has laid out five basic criteria for discussion — minimum capital requirements; caps on promoter and other shareholders; foreign shareholding; eligible promoters and business plan.

The paper elucidates each of these aspects, and also deals with the pros and cons of various approaches under each. While the regulator may not be averse to granting licence to industrial houses and NBFCs, the primary concern seems to be the systemic risks posed by different businesses carried out under an umbrella entity. In addition, there are also concerns on the conflict of interest through self-dealing at the expense of bank clients and transactions between bank and its affiliates. Large industrial houses also pose difficulties in supervision and regulation, and their operations may not be well regulated, making it difficult to assess the ‘fit and proper’ status. The ownership structure of industrial and business houses may also make it complex to assess the true capital structure of the bank. The regulator also has concerns on possible concentration of economic power in all major areas of business and finance. Another option looked at could be the acquisition of regional rural banks by industrial and business houses before allowing them to set up banks which, according to the regulator, would give them the opportunity to prove their suitability for promoting banks.

Foreign shareholding in new banks has also been explored, while proposing that it should be capped at a suitable level below 50 per cent and locked at the level for 10 years. The option of NBFCs converting into banks has also been studied. The regulator has not precluded any category of promoters except those having business interests or links with real estate sector. The overall objective of financial inclusion for grant of new banking license has also been given due weightage with clear articulation of strategy and the targets for achieving significant outreach in tier three to six centers.

The regulator has dealt with all the possible options. However, the concerns and qualifications will hinge on attracting the earnest players, proper risk management and furthering financial inclusion.

Ashvin Parekh, Partner , National Leader - Global Financial Services, Ernst & Young