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Indian banks get a makeover

In the run up to the union budget, the Reserve Bank of India (RBI) had issued its fresh guidelines for allowing new private sector banks. The RBI announcement was followed up by the finance minister in his budget speech and it was promised that the new banks licences should be cleared soon. Yet later, RBI had invited prospective applicants for bank licences to raise any of their doubts or clarifications about the new RBI guidelines and post these to the central bank before the process of selection of new entrants kicks off later in the year. The evolution of the new bank licencing policy is a long story, intertwined with the evolution of Indian banking industry since nationalisation.

When banks were nationalised first in the ’60s, most of the larger banks were owned by established industrial houses. These banks were, by and large, confined to the port towns and large cities. They catered primarily to the credit requirements of large industrial borrowers and banking coverage in the rural areas was virtually unknown. Nor did the banks give credit to smaller industries, let alone give loans to farmers or artisans and for really small businesses.

For the first time in 1993, Reserve Bank had allowed new banks to come in.

After the nationalisation of 14 larger banks in 1969, progressively, over this period, public sector banks have expanded their branch network considerably and catered to the socio-economic needs of large masses of the population, especially the weaker section and those in the rural areas. In 1993, the public sector banks had 91 per cent of the total bank branches and handled 85 per cent of the total banking business in the country. Thus, in 1993 it was thought that the ‘stage had come when new private sector banks may be allowed to be set up.’ The 1993 guidelines stipulated a paid-up capital base for new banks of Rs 100 crore, shares were required to be listed, preference was given to applicants whose banking headquarters were situated away from the metropolises and overbanked areas, individual shareholder’s voting right limit was set at one per cent and there were restrictions on appointment of directors. Ten new banks were allowed to start business under the 1993 guidelines.

In 2001, the policy for allowing fresh entry of banks was once again looked into. After a review of the experience gained on the functioning of the new banks, Reserve Bank decided to revise the licencing guidelines. The fresh guidelines issued in 2001 raised the paid up capital requirement to Rs 200 crore initially which had to be upped to Rs 300 crore within three years. This time, RBI insisted that the promoters shall contribute 40 per cent of the paid-up capital and a lock-in period of period five years within which they should not be able to sell their holdings. While permitting new entrants, the Reserve Bank this time tried to firewall the banks from large industrial houses and also ensure that the banks maintain an arms’ length relationship with the promoter groups. It thus explicitly provided ‘the new bank should not be promoted by a large industrial house.’ However, individual companies, directly or indirectly connected with large industrial houses may be permitted to participate in the equity of a new private sector bank up to a maximum of 10 per cent but will not have controlling interest in the bank. The guidelines also provided that the new banks shall not extend any credit facilities to the promoters and companies investing up to 10 per cent of the equity.

The Indian economy as well as the banking industry has changed in the last decade. There is re-thinking once again on entry of new private sector banks. This is because, despite opening up twice, the banking scene is still dominated overwhelmingly by the public sector. The dominant new banks, which have come to the fore, are still only variations of public sector ones, like the ICICI Bank, which was a metamorphosis of Industrial Credit and Investment Corporation of India or Industrial Development Bank of India. Hence, RBI had decided to re-open the entry gates once again to new private sector banks. This time however, RBI is much more ambitious and the earlier approach of firewalling banks from industrial houses has been largely given up. The policy has been evolved over the last two years since August 2010 when the Reserve Bank put out a discussion paper on fresh norms for allowing private banks.

The discussion paper addressed a large of issues to be debated and decided before fresh licences could really be given. After all, banks were nationalised for certain reasons and some of those concerns were still valid and had to be answered before granting fresh licences.

Now that the details of RBI’s latest policy guidelines regarding fresh licences have sunk in, questions are being asked on various aspects of the new policy issued. RBI has stated that it will post all queries and issues clarifications on these. Maybe, it is badly needed given the many questions that arise from a reading of the policy guidelines. In fact, these raise more questions than they answer.

RBI’s 2010 guidelines had addressed some of the fundamental concerns over how Indian banking industry should stand vis-à-vis the country’s major private sector industrial houses. Should the industrial houses be allowed to float the new banks or should they be kept at arms’ length distance as stipulated previously. In the light of the experience of opening up the banking sector in a limited way, the RBI had now drawn on nits experience to decide these questions.

The new RBI policy is much more open and forthright. It does allow industrial houses entry into banking, although some safeguards have been built in the policy. Once these come ion force and new banks are allowed in, Indian banking could undergo the most critical transformation once again.

Everything changes with time. Banking cannot remain still. (IPA)
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