New bank licences norms after amending Banking Act

Corporates looking to enter the banking business will have wait for some more time, as the government is considering amendment of the Banking Regulation Act and Banking Laws Act before finalising the guidelines for giving new licences.

The final guidelines on the new banking licences would be released only after the necessary amendments to the Banking Regulation Act and Banking Laws Act are cleared by Parliament, official sources said.

However, the draft guideline for the new banking licences would be out by the end of this month for public comments, sources added.

Sources added that empowering the RBI is essential for obtaining information about the other businesses of the corporate houses seeking banking licences in order to protect depositors' interests.

The government, sources said, is considering amendment of the Banking Regulation Act to expand the powers of the RBI to enable so that it can seek information from entities involved in the insurance and asset management business, in addition to banks.

Sources said this is relevant, as the risks of companies involved in businesses like insurance and asset management may sneak into the banks' account books by virtue of the same parentage, sources said.

The Banking Regulation Amendment Bill is likely to be tabled in the Monsoon Session of Parliament.

At present, insurance companies are regulated by the Insurance Regulatory and Development Authority (Irda) and the asset management business comes under the purview of Sebi.

After clearance of the Bill, the RBI would have the power to call for information and assess information, sources said, adding these powers are required if the private entities are allowed to enter into the banking space to protect the interest of depositors.

As per the current practice, India follows a subsidiary model where the non-banking businesses of a bank, like insurance and asset management, are subsidiaries. By virtue of this, risks attached to these businesses can impact the banking entity.

The apex bank had brought out a discussion paper in August, 2010, on giving out new banking licenses to business houses and non-banking finance companies, besides regulations for the same to foster competition.

The RBI also sought to know "whether industrial and business houses could be allowed to promote banks."

Various entities like Reliance Capital, India Bulls, Religare, IFCI and Aditya Birla Financial Services are said to be mulling an entry into the banking space.

India presently has 27 public sector banks, seven new private sector banks, 15 old private sector banks, 31 foreign banks, 86 regional rural banks, 4 local area banks, 1,721 urban cooperative banks, 31 state co-operative banks and 371 district central cooperative banks.