Trust the gatekeeper

RBI can be relied upon for a fit and proper policy

The news of a meeting of minds between the Union finance ministry and the Reserve Bank of India (RBI) on the government’s policy on issuing licences to new private sector banks has been widely welcomed. India needs new banks and a transparent and robust policy framework will boost public confidence in the licensing process. Given the heightened public concern about transparent licensing procedures, it is most unlikely that the government and the central bank would do anything to invite criticism. Although the final policy framework will be made public next week, information suggests that the minimum capital requirement for a new bank would be Rs 1,000 crore, of which the promoters’ contribution is expected to be fixed at 40 per cent, to be brought down over a 10-year period to half that. As several analysts have noted, the guiding principle for both minimum capital required and the ceiling on promoters’ quota should be that they are consistent with existing and widely acceptable risk management norms. The new policy framework is also expected to limit foreign shareholding in new banks to 49 per cent. In defining policy on this issue, the central bank may consider the suggestion made by some analysts that the definition of “foreign shareholding” should include, rather than exclude, the category of non-resident Indians. In other words, anyone permanently residing outside India should be classified into one category of “foreign investors”, for both investment and taxation purposes.

The most contentious and controversial issue relating to the policy on new private banks remains the question of whether “large industrial houses” should be allowed to own new banks. The existing policy, defined at the time of bank nationalisation in 1969 and subsequently tweaked, disallows it. There is neither global uniformity on the issue nor an accepted “best practice”. Global experience does not establish that there is anything inherently right or wrong about permitting industrial houses to own banks. However, there is no pressing reason for the government to revisit the existing policy at this point in time. It has been reported that the Union finance ministry would like to liberalise the policy, with riders and caveats that would disallow companies in areas like real estate from investing in banking. It is best to leave the matter to the central bank’s judgement, which is capable of defining who is a “fit and proper” applicant and what constitutes a “fit and proper” criterion for granting bank licences. The central bank would naturally consider issues like concentration of business power, the need for checks and balances even in the private sector, and the need to identify credible private sector entities that have the resources to set up and run a bank. There are ways in which the power and control that can be exercised by private owners over banks can be restricted and RBI has pointed to this in its original discussion paper. The central bank is the best judge of its capability to regulate, monitor and punish large private sector entities, and should base its policy on an objective assessment of its own capabilities to regulate the private sector.