'Fit & proper' criterion doesn't clash with RBI's inclusion drive: Jalan

Declines to share his views on whether RBI should allow industrial houses to set up banks in India

The Reserve Bank of India (RBI) should not compromise on its ‘fit and proper’ criterion while offering new banking licences to promote financial inclusion, said former RBI governor Bimal Jalan.

The RBI has, in principle, approved banking licences to two — Bandhan and IDFC — of the 25 applicants. The decision surprised many as it was believed new licences were this time offered to expand the reach of financial services to remote corners.

Jalan, who headed a four-member high-level advisory committee that scrutinised the applications for new banking licences, defended the central bank’s decision of granting licences to only two applicants.

“I cannot comment on the policy, it will not be fair. There is no contradiction in the principle of financial inclusion and the ‘fit and proper’ criterion. It is a criterion to make sure other people’s money, which is what banks deal with, is disbursed and allocated in a manner that is appropriate,” he said while responding to queries on why only two new licences were offered by the central bank.

He declined to share his views on whether RBI should allow industrial houses to set up banks. “I don’t want to make a comment. I leave it to the RBI,” he said.

In contrast to a decade ago, when large industrial groups were not permitted to run banks, the RBI had accepted applications from industrial groups for a licence in this around. While corporate houses, including the Ambanis, Birlas and Bajajs, had applied, none of them was granted a licence.

But RBI Governor Raghuram Rajan recently clarified there was hope for some of these groups, as the central bank was evaluating options to offer more licences. “We went through the list. This was the set of applicants the (Bimal) Jalan committee and the RBI felt comfortable with. We have opened up the possibility that will allow applicants to apply again once we start giving licences on tap, as well as create differentiated banking licences. Some of the applicants will be better off applying for a differentiated licence, rather than a full bank licence,” Rajan said at a seminar in Pune last week.

Internationally, it is fairly common for industrial houses to operate banks. Only 12 per cent of countries restrict the mixing of banking and commerce, according to the RBI’s discussion paper on new bank licensing.