RBI suggests banking sector overhaul

Discussion paper moots continuous banking licence regime; 4-tier structure; says less govt stake in PSBs is a good idea

The Reserve Bank of India (RBI) has proposed a comprehensive overhaul of the country’s banking structure, to increase competition and growth, and for further financial inclusion.

At present, only a universal banking structure is allowed; there is no separate licencing for niche activities as in developed nations. The central bank still thinks the universal model is the preferred model, particularly in the aftermath of the global financial crisis. However, it acknowledges the need for differentiated banking licences — for infrastructure financing, retail banking, wholesale banking and investment banks.

In a discussion paper issued on Tuesday, titled ‘Banking structure in India — the way forward’, the regulator has provided a road map for the reorientation. It proposes a four-tier structure, with the first tier of three to four large banks, with sizable international presence.

“The second tier is likely to comprise several mid-sized banking institutions, including niche banks with economy-wide presence. The third tier may encompass old private sector banks, regional rural banks and multistate urban cooperative banks,” the discussion paper said. The fourth tier might embrace many small privately owned local banks and cooperative banks.

For the creation of large banks, consolidation seems the way forward, the paper suggests. “The issue has assumed significance, considering the need for a few Indian banks to cater to global needs by becoming global players, and the growing corporate and infrastructure funding needs,” it said. Adding that such activities should be based on synergies and cannot be imposed.

Breaking away from the tradition of ‘stop and go’ licensing, RBI has also proposed a continuous authorisation policy. Till now, the country has seen three phases in bank licences — in 1993, 2001 and the present process which started in 2010.

“There is a case for reviewing the current ‘stop and go’ licensing policy and consider adopting a ‘continuous authorisation’ policy, as continuous authorisation keeps the competitive pressure on existing banks and also does not strain the banking system as ‘block’ licensing may do,” RBI said.

However, it says such a policy could only be adopted after ensuring the entry norms are stringent, to encourage only well-qualified entities.

While acknowledging the need for large banks, the regulator has also kept in mind the need for smaller banks to cater to small borrowers. “Small local banks play an important role in the supply of credit to small enterprises and agriculture, and banking services in unbanked & under-banked regions,” RBI said.

The issues surrounding capital requirement, corporate governance and exposure norms, among others, of smaller banks needs to be addressed, it said, while permitting these entities.

RBI has also suggested the government consider reducing its stake in public sector banks. PSBs have two-thirds of the market in India. The paper says this would improve their performance. The current norms stipulate the government should hold at least 15 per cent in PSBs. The government is also challenged in infusing capital in these banks, also straining its fiscal position.

“As regards the reduction in fiscal burden on account of recapitalisation of PSBs, the government may consider options from a menu of choices available, such as issue of non-voting equity shares or differential voting equity shares, adopting FHC (financial holding companies) structure or diluting stake in PSBs,” the discussion paper said.