RBI focus on consolidation, niche licence

Discussion paper on banking structure rejig by June-end

The Reserve Bank of India (RBI) today said it will release a discussion paper on the banking structure in India by the end of next month that will debate on issues like consolidation of existing banks, differentiated banking licence, presence of foreign banks and having localised banks as vehicles of financial inclusion.

"The Reserve Bank would prepare a policy discussion paper on the banking structure in India, keeping in view the recommendations of the Committee of Banking Sector Reforms (1998), the Committee on Financial Sector Reforms (2008), and other viewpoints," the banking regulator said.

While the consolidation in the banking sector was the most debated topic a few years back, the subject was hardly mentioned after the then finance minister Pranab Mukherjee invited new players to set up banks in his budget speech in February, 2010.

Consolidation was favoured by many as it was considered essential for creation of large-sized Indian banks that could compete with their international peers. However, industry analysts now express doubts if RBI will be able to consolidate state-run banks in the country.

"It is a no brainer as it makes a lot of sense. But practically we have miles to go. I don't think it is in the hands of RBI and the government needs to step in. How will you tackle the trade unions? State Bank of India is struggling to merge its associates. Consolidation has its own advantage but I don't think it will happen any time soon," a senior director with a global consultancy firm said requesting anonymity.

Industry analysts also felt that there was a need for differentiated licensing regime for domestic and foreign banks.

"Many players will prefer to have a differentiated licence instead of universal banking licence. That will allow them to avoid priority sector lending targets and CRR (cash reserve ratio), SLR (statutory liquidity ratio) requirements. The only question is whether India, where over 40% population is still un-banked, is ready for a differentiated licensing regime," said an analyst.

"The paper is supposed to highlight various aspects on banking activities and it seems that RBI would avoid any 'one-hat-fits-all' strategy. Thus, interested players will now eagerly await the discussion paper," Hemant Kanoria, chairman and managing director of Srei Infrastructure Finance, said.

According to industry experts, the discussion paper is aimed to bring uniformity in the structure of banks.

"Many large banks in the country have multiple businesses. They have insurance, mutual fund, asset management and broking businesses other than banking. But each one of them has a different structure. These different structures create a challenge for the regulators. The primary objective of the discussion paper is probably to debate on this matter and offer more clarity on the corporate structure of financial service businesses (of banks)," Akeel Master, partner – financial services at KPMG India, said.