Budget may have roadmap for new private banks

India is considering allowing new private sector banks, including those by industrial houses, and a roadmap for the same could be announced in the Union Budget to be presented later this month.

While the formal and final guidelines regarding who should be allowed to set up new banks and what should be the terms and conditions would be announced by the Reserve Bank of India (RBI), a roadmap could be announced in the Budget speech on February 28 by Finance Minister Pranab Mukherjee, sources said.

In his Budget speech last year, Mukherjee had said there was a need for extending the geographic coverage of banks and improving access to banking services. RBI was close to finalising the guidelines for the entry of new banks in the private sector, based on its consultations with the government and various stakeholders, as also the feedback to its August 2010 discussion paper on the issue, sources said.

Among other options, RBI was considering the grant of licences to small banks for the initial few years, which could be upgraded to full-fledged banking licences after it was satisfied with their performance and the fulfillment of certain criteria, sources said.

The guidelines would dwell upon issues like the minimum capital for new banks, the promoters’ contribution, minimum and maximum caps on the holding of promoters and others, foreign shareholding, business model and whether industrial houses and NBFCs (non-banking financial companies) could be allowed to run banks.

Among others, a number of corporate houses, including Anil Ambani-led Reliance group, the Aditya Birla group and the Religare group, have expressed interest in obtaining banking licences. A number of NBFCs and micro-finance institutions are also said to be interested.

In his Budget speech in February last, Mukherjee had said RBI was considering giving additional banking licences to private sector players and NBFCs could also be considered if they met the eligibility criteria.

Pursuant to this, in its annual policy statement in April 2010, RBI said it would prepare a discussion paper marshalling the international practices, the Indian experience as well as the extant ownership and governance guidelines for the grant of new private sector banking licences. The discussion paper was put out for feedback on August 11, 2010 and thereafter the central bank held discussions with various stakeholders from the industry, banks, NBFCs, MFIs, consultants and other entities.

In December 2010, it made public the gist of the comments received on its discussion paper and said “the range of comments received has been very wide and does not indicate consensus on any of the issues.”

RBI has said new licences were required since vast segments of population, especially underprivileged, still have no access to banking services.