Tough norms for banking licences to corporates

Ring-fencing from exposure to sister companies, limit on exposure to non-financial sectors to feature in new guidelines.

Corporate houses will have to bring in structural changes in their association with their sister companies and exposure to the non-financial sectors for getting new banking licences.

A senior finance ministry official told Business Standard that under the new guidelines, to be issued soon, corporate houses will be allowed to take new banking licences but it would be in different formulation.

“They will have to get in some structural elements. They will have to do ring-fencing from exposure to the sister companies,” he said.

The official added that in case of the non-financial sector also, there could be some limit to the exposure.

He said it would take time before new licences could be issued under the new norms.

“RBI is planning to issue the guidelines for banking licences before the close of this financial year (2010-11),” Finance Minister Pranab Mukherjee had said in his Budget speech in February.

After the finance minister’s announcement in the 2010-11 Budget, the Reserve Bank of India (RBI) had brought out a discussion paper in August 2010 on dispensing banking licences to business houses and non-banking finance companies, besides regulations for the same to foster greater competition.

In its discussion paper on the issue, RBI also mentioned possible safeguards to address the downside risks of industrial and business houses promoting banks.

“The structure proposed for promoting banks should be such that the bank can be ring-fenced from other financial and commercial entities in the group. RBI should be satisfied about its ability to supervise the bank and obtain all required information from the group relevant for this purpose smoothly and promptly,” the bank has mentioned as one of the steps in this regard.

The discussion paper has also suggested that no objection certificate of the promoters credentials, integrity and background should be taken not only from banks and other regulatory agencies but also from investigating agencies like the Central Bureau of Investigation, Enforcement Directorate, and income tax authorities.

At present, India has 27 public sector banks, seven new private sector banks, 15 old private sector banks, 31 foreign banks, 86 regional rural banks, four local area banks, 1,721 urban cooperative banks, 31 state cooperative banks and 371 district central cooperative banks.

The entities currently mulling to enter the banking arena include Reliance Capital, IndiaBulls, Religare, IL&FS, IFCI and Aditya Birla Financial Services.