RBI Governor briefs MPs on new bank licences

Members of Parliament panel on finance quizzed the RBI chief on central bank's norms for awarding new bank licences

Concerned over the possibility of crony capitalism creeping into the banking sector with the grant of new licences to business houses, members of a Parliamentary panel on Tuesday asked RBI Governor D Subbarao to give a structured response on the issues flagged by them. Members of the Parliamentary Standing Committee on Finance quizzed the RBI chief on central bank's guidelines for awarding new bank licences, sources said.

Subbarao made a presentation before the Committee on the proposal for the new bank licences for which applications have been invited from corporates and public sector entities by July 1. The members wanted to know how the RBI proposes to prevent diversion of funds by industrial houses owning banks to their own companies and prevent crony capitalism, citing example of coal and telecom sectors.

Some members cautioned the RBI against adopting auction route for grant of bank licences, arguing that it could encourage industrial houses with doubtful credentials to obtain licence. The issue of Cobrapost expose with regard to allegations of money laundering by ICICI Bank, HDFC Bank and Axis Bank was also raised during the meeting. Subbarao is reported to have informed the members that the central bank was in the process of examining the allegations.

The members wanted to know how RBI would ensure compliance of the guidelines with regard to fit and proper criteria and mandatory opening of rural branches by the new banks. The Governor, sources said, "was forthcoming in his replies and has indicated that new licences will be issued after thorough scrutiny of applications".

According to the guidelines issued by the Reserve Bank earlier, the minimum paid-up capital for setting up a bank has been pegged at Rs 500 crore. The cap on the foreign investment, including FDI/FII and NRI, has been set at 49 per cent.

Before granting licences, RBI would seek feedback about applicants from other regulators, enforcement, investigative agencies like I-T Department, CBI, ED, as deemed appropriate. According to norms notified by RBI, on receipt of licence, promoter has to start operations within one year and list the company within three years of commencement of the business. Also, new banks should open at least 25 per cent of branches in unbanked rural centres.

At present, there are 26 public sector banks and 22 private sector banks. Following the grant of licence, the promoter group, which could be a public sector entity as well, will be required to set up a wholly-owned Non-Operative Financial Holding Company (NOFHC).

The NOFHC is aimed at protecting the banking operation from extraneous factors like other business of the Group i.e., commercial, industrial and financial activities not regulated by financial sector regulators. Existing non-banking financial company (NBFC) will be eligible to apply for a bank licence.