Government presses RBI on new bank licences

FM, CEA want final guidelines soon observers sceptical on any quick entry

The message to the Reserve Bank of India (RBI) is loud and clear from the corridors of North Block — frame the final guidelines on new banking licences and allow private entities to set up new banks as soon as possible..

After the change of guard in the finance ministry, with P Chidambaram taking charge, it has asked RBI to expedite the process, people familiar with the development said.

Apart from the minister, say central bank sources, Raghuram Rajan, the new chief economic advisor, has spoken similarly during his interaction with the RBI brass. However, even if RBI issues the final norms this month, allowing business houses to apply, the number of banks is unlikely to increase anytime soon, sources said.

TIMELINE

February 26, 2010
Former finance minister and now President Pranab Mukherjee announces in his Budget speech for 2010-11 that companies and 
business houses will be allowed to set up new banks

August 11, 2010
Reserve Bank of India releases
discussion paper on entry of new banks in the private sector

December 23, 2010
Reserve Bank of India releases gist of comments from 
the feedback on the discussion paper

August 29, 2011
Reserve Bank of India releases draft guidelines for 
licencing of new banks in the private sector

July 10, 2012
Reserve Bank of India releases gist of comments from
the feedback on draft guidelines

For, the central bank is yet to set up a committee for examining such applications. “The committee will be formed only when final guidelines are in place. It will then scrutinise the applications. So, don’t expect anything to happen for the next 12-18 months,” said a source.

The government, however, is determined to set the ball rolling in this season of reforms. RBI had said it was awaiting amendments in the Banking Regulation Act before issuing the final guidelines. RBI wants more power, such as dissolving a bank’s board, before it allows new entrants. However, “the ministry said the Act will be amended but it should not hold RBI from forming the guidelines”, said another source. Also, there were opinions that at least non-banking finance companies (NBFCs) be allowed to set up banks till the Act was amended.

Interestingly, RBI has asked the government to extend the tenure of one of its deputy governors, Anand Sinha, by a year. Sinha will complete his two-year term in February 2013 and heads the department of banking operations and development that will issue the final guidelines on new banking licences.

Pranab Mukherjee, the former finance minister and now the country’s President, had said in his 2010-11 Budget speech that companies and business houses would be allowed to set up new banks. RBI released a discussion paper on the entry of new players in August 2010. A year later, it issued the draft guidelines. In July this year, it released the gist of the comments it had got on the draft norms.

RBI had suggested the initial minimum capital must be Rs 500 crore; it received feedback that recommended Rs 1,000 crore as the minimum. It also wanted new banks to be listed within two years and have a fourth of all branches in hitherto unbanked rural centres.

But NBFCs and federations suggested only 15 per cent of branches should be in rural areas and asked the central bank to extend the listing deadline, to four to five years.