Banking on licences

RBI sets tough entry norms for new private banks

The Reserve Bank of India (RBI) has made it clear that it would like to ensure only the “fit and proper” make the grade when it comes to securing licences to set up private banks. The onerous criteria laid down by the central bank do not explicitly bar firms with an interest in other lines of business activity, outside of real estate and capital market, from securing licences. But to do so these firms have to meet more stringent norms than insisted on ever before. The draft also explicitly refers to the need to prevent “self-dealing” by promoters. Given the mood in the country today, it is just as well that RBI has laid down such tough eligibility criteria. Finally, as in the past, the central bank has said a high-level group will process the applications after due diligence by various regulatory authorities as well as enforcement and investigation agencies. The initial minimum capital requirement of Rs 500 crore is well below the widely expected Rs 1,000 crore and, understandably, above the Rs 200 crore that was specified in 2001 when the last round of issuing licences to private banks was opened, given the new global prudential environment. While Finance Minister Pranab Mukherjee tried to adorn his budgetary initiative of issuing fresh banking licences in the garb of “inclusive growth” by citing the “need to extend the geographic coverage of banks and improve access to banking”, the draft guidelines fix a more modest obligation to open at least 25 per cent of new branches in unbanked rural centres. This should take some sweat off the brow of potential applicants. They can continue to rely on the more lucrative urban and semi-urban areas for most of their business.

The second reason cited by Mr Mukherjee was the “need to ensure that the banking system grows in size and sophistication to meet the needs of a modern economy”. The financial crisis that hit the world after Lehman Brothers collapsed resulted partly from banks having become too sophisticated for anybody’s good. The RBI guidelines refer to this when they say, “post-crisis, there are concerted moves even internationally to separate banking from proprietary trading”. Currently, there is a feeling that banks should concentrate on their primary task, meet the credit needs of businesses, small and big, and individuals and not get into sophisticated products like complex derivatives. Not only have large companies bypassed banks through disintermediation for some time now, currently the sharp difference between domestic and international lending rates has raised the incentive for those who can bypass banks to borrow abroad. The real gap in banking services in India is inadequate coverage of small and medium businesses, those who are too poor, and those in places too remote to have a bank account. It is not clear how this gap will be addressed by having some more banks of the kind that already exist in plenty. On the other hand, the fact that final guidelines will now take more time to be issued and, more importantly, the fact that applications will only be invited after the Banking Regulation Act has been suitably amended to account for the specified guidelines suggest that RBI is not in a hurry to open doors for new private banks. Such caution is well advised.