Manojit Saha: RBI will issue bank licences, but who will decide?

All of them are dressed up, but there is no sign that the party will begin soon

From SREI Infrastructure to Shriram Finance, from Birla to Ambani, everyone has nurtured the dream to own a bank. Some of them had dreamt it for a long time, while the others started fancying their chances after former finance minister Pranab Mukherjee announced that new bank licences would be issued in 2010 during his Budget presentation.

Be it a holding company structure – as proposed by the draft guidelines on new bank licences – or deciding on the name of the future bank, the Indian corporate sector has readied itself even before the final norms are laid out. Of course, between the final norms and before the first licence is handed out, there will be considerable time that will be consumed, as the Reserve Bank of India is yet to form a committee which will refer the ‘fit and proper’ criteria.

And yes, it is the Reserve Bank of India, which will issue the licences. It is the Reserve Bank of India, which has not issued any fresh licenses for the last ten years, not issued the final guidelines, even after two and half years of the 2010 Budget announcement. A few simple facts depict the banking regulator’s keenness to have new players in the sector: Following the government’s announcement in February 2010, a discussion paper was released in August 2010. After one year, in August 2011, the draft norms were released. And last July, a ‘gist of comments’ on the draft guidelines were issued.

One important caveat, however, was made clear by the RBI governor, in one of his speeches. That the banking law needs to be amended – essentially to provide the regulator more powers such as superseding a bank’s board – before it could invite fresh applicants.

The pace at which the central bank approached to open up the sector to new players perhaps reveals its apprehension following the series of events – from airwave allocation to coal block scam – that embarrassed the government. The word licence has become forbidden for many central bankers.

Central banking sources indicate that RBI will be extra cautious to issue new licences, albeit pressure from the finance ministry on this issue has escalated with the change of guard at the North Block. (Perhaps, this is one of those rare issues where P Chidambaram and Pranab Mukherjee share the same view.)

The question that many in RBI’s department of banking operations and development (DBoD)  – which has  formulated many important norms in the past be it real estate exposure or gold loan – are asking is that RBI may issue licences but will it be able to take decisions independently without the interference of the government?  DBoD will issue the final guidelines on banking licences and also vet the applications of the prospective entrants.

In mid-2009, a note was prepared in RBI to debate whether to have more banks in the country. No decision was taken at that point in time. It had surprised many in the central bank that a finance minister in his Budget speech was announcing that RBI would consider issuing fresh licence – something unprecedented. This perhaps explains that pace at which the central bank approached the entire issue.