Defending its decision to allow business houses to apply for banking licences, the Reserve Bank of India (RBI) on Saturday said the ability of these entities to use their deep pockets to finance capital and technology-intensive projects would help boost financial inclusion.
Many such as eminent economist Joseph Stiglitz and former RBI governor Y V Reddy had raised concern on allowing corporate houses into banking. An International Monetary Fund staff report had said this would lead to conflict of interest. However, RBI pointed out the advantages of such a move and highlighted the safeguards taken to implement it. “Financial inclusion being the overall objective of the present bank licensing policy, it was considered industrial houses with their deep pockets could fill the gap, as financial inclusion is a capital and technology-intensive project,” RBI Executive Director B Mahapatra said at a seminar in Pune on Saturday.
He added many business houses already operated in other financial services sectors such as insurance and mutual funds and these could provide capital and offer management expertise and strategic direction to banks. Industrial houses also have experience in operating highly regulated sectors such as telecom, power, airports, highways and ports.
“Equities of large industrial and business houses are widely held, listed on the stock exchanges and are subject to the Companies Act, Securities and Exchange Board of India rules and regulations on transparency, disclosure and corporate governance. Permitting industrial and business houses to own a limited number of banks should not lead to undue concentration of control of banking activities, as the Indian banking system is largely dominated by public sector banks,” he said.
In the last two rounds of licensing, RBI hadn’t allowed industrial houses to set up banks, primarily owing to concern of conflict of interest. It was feared allowing industrial houses in the banking sector would give them an opportunity to use public deposits to finance their group businesses.
Mahapatra, however, said he felt the new guidelines on bank licensing would prevent such wrongdoings, as the proposed non-operative financial holding company (NOFHC) structure would ring-fence regulated financial service entities of the group, including the bank, from other group businesses. Also, a new bank would have diversified ownership, as no single entity or group of related entities, other than the NOFHC, can have shareholding of more than 10 per cent of the paid-up voting equity capital.
“With a view to mitigating conflict of interest and ensuring there is no self-dealing, the new banks will not be permitted to take any credit and investments exposure on the promoters or promoter group entities or individuals associated with the promoter group or their NOFHCs. Further, the banks promoted by groups with at least 40 per cent assets or income from non-financial business would need RBI’s prior approval for raising paid-up voting equity capital beyond Rs 1,000 crore for every block of Rs 500 crore. The above prudential norms, coupled with adequate safeguards, would ring-fence the banking entity,” Mahapatra said.
Amendments to the Banking Regulation Act have empowered RBI to supersede the boards of banks to secure proper management.
Mahapatra said RBI didn’t opt for auctioning of bank licences, as this was “unheard of in any jurisdiction”. He, however, said RBI’s regulatory and supervisory effectiveness would be tested in preventing new banks promoted by industrial houses from self-dealings. “It is yet to be tested whether the ring-fence would work effectively or it could be circumvented. Therefore, we, at RBI, need to be extra vigilant to protect the interests of depositors.”.
Reasons for allowing corporate houses in the banking sector:
Industrial houses already operate in highly regulated sectors and other segments of financial services.
Industrial houses can provide capital, management expertise and strategic direction to banks.
Industrial houses are generally widely held and already comply with rules relating to transparency and corporate governance.
Industrial houses will be more keen to keep their reputation intact than individuals.
- Public sector banks dominate the banking system. Few industrial houses setting up banks will not lead to concentration of power.