Rbi Reverses Liberalised Branch Licensing Policy Legislative

The Reserve Bank of India (RBI) has made a major reversal in its liberalised branch licensing policy, which allows profit-making public sector banks full freedom to open new branches.

From now on, to open new branches or upgrade extension counters into full-fledged branches, public sector banks, including profit making ones, will have to submit to the central bank a plan of action approved by its board of directors 12 months in advance.

The earlier bank licensing policy required all banks, irrespective of their financial health, to get their expansion plans cleared by the central bank.

The 1995 branch licensing policy reversed this rule and allowed banks with net profits for three years in a row, a capital adequacy ratio of at least 8 per cent, non-performing assets of less than 15 per cent and minimum owned funds of Rs 100 crore to open branches without the RBIs prior permission. Proposals received from all other banks would be considered on a case by case basis, depending on their financial positions.

However, banks incurring losses for the previous two or more years would not be allowed to open any new branches except in cases where firm commitments have already been made. Now, however, the policy has been reviewed and even banks satisfying the above conditions will have to obtain permission.

This policy revision is significant in the light of recent developments which have seen the Reserve Bank trying to strengthen its control over the financial sector. The revision will clearly allow the central bank a greater say in the location of new branches of public sector banks.

The clarification is also important in view of Section 23 of the Banking Regulation Act, 1949, which states ...without obtaining the prior permission of the RBI, no banking company shall open a new place of business in India or change otherwise than within the same city, town or village, the location of an existing place of business situated in India; and no banking company incorporated in India shall open a new place of business outside India or change otherwise than within the same city, town, village or country the location of an existing place of business situated in that country or area.

The branch licensing policy of 1995, which allows profit-making banks full freedom to open new branches, will, therefore, not hold without an amendment to the Banking Regulation Act. RBI sources told Business Standard that the revision was clearly an attempt by the bank to cover up the earlier slip-up.

Sources also point out that the policy, in its form prior to the revision, would accentuate the difference between profit and non-profit making public sector banks. The former, with their newly-found freedom, would open up more branches in profitable localities while the latter would not be permitted to follow suit.