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RBI banks on private players

The banking scenario in India is set to heat up  once more with  the RBI declaring that it would publish guidelines for new banking licences  by the end of this month, which means we can see the entry of at least five new banks in  the sector in the next financial year. Corporate biggies like Reliance, Religare, L&T and the Aditya Birla  group are apparently fully prepared  to apply for licenses given the policy framework is on expected lines.  They have been on the fray for at least two years now, since the RBI had announced that it would be issuing new licenses to private banks once more.  All the four groups above has huge corpus of funds and have experience in the financial sector though Religare, largely a financial company and L&T, still counted as an engineering major, are two sides of the spectrum. But sources say that with strong guidelines in place, the RBI may not be too strict on the business history of corporates applying for a license, which means that those without major experience or expertise in financial markets may still get a banking license.  Of course, the credibility and profitability of the new banking companies will depend on financial returns and customer satisfaction.

Though the RBI’s policies are robust and have enough built in security, the licence decision comes in the wake of Nobel Laureate economist Joseph Stieglitz strongly advising against corporates being given banking licenses. Only last week, at the invitation of the RBI, he spoke powerfully against the trend, arguing that it leads to conflict of interests.  Experts however feel that there can be enough checks and balances created to ensure that conflict of interest does not compromise the banking sector and RBI, they say, have the best guidelines in the world to ensure the same. This could be true. But the very basics of economics and policy standards are changing and the RBI may want to look at its own guidelines carefully once more to ensure that no corporate major gets any kind of financial leeway as far as the banking sector is concerned. India has a robust banking sector and no major history of bank failure. The RBI must do everything to ensure that the no one can jeopardise its clean record. While reforms are welcome and necessary, corporate majors may try to arm twist government institutions, but at no cost they must be successful, especially when they are dealing with public money.
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