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P. Devarajan

Is a case being made for conversion of some NBFCs such as Sahara and Peerless into banks? Nobody is sure.

RECENTLY, the Union Finance Minister, Mr Jaswant Singh, said more licences would be issued to set up private sector banks.

That statement has surprised many on Mint Street as the RBI guidelines on entry of new banks in the private sector issued on Jan. 3, 2000 do not permit such luxurious gestures.

Coming under heavy lobbying, the RBI, in 2000, came up with a policy banning large industrial houses from setting up banks. The RBI said: "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 10 per cent limit would apply to all inter-connected companies belonging to the large industrial houses concerned.

In taking a view on whether the companies, either as promoters or investors, belong to a large industrial house or to a company connected to a large industrial house, the decision of the RBI will be final.

In the case of conversion of NBFCs into private sector banks, the RBI said, "The NBFC should not have been promoted by a large industrial house or owned/controlled by public authorities, including local, State or Central Governments."

Is a case being made for conversion of some NBFCs such as Sahara and Peerless into banks? Nobody is sure.

Most importantly, the RBI policy stated: "As a number of banks are already functioning, licences will be issued on a very selective basis. Preference will, however, be given to promoters with expertise of financing priority areas and in setting up banks specialising in the financing of rural and agro-based industries. The number of licences to be issued in the next three years may be restricted to two or three of the best acceptable proposals. This number would also include permission granted to any NBFC for conversion into bank. If the number of acceptable proposals of the highest standards are more than three, this limit may be relaxed on recommendation of the Advisory Committee."

Under the 2000 policy, Kotak Mahindra Finance Ltd and Rabobank were issued licences; Kotak has started banking while Rabobank is yet to open counters.

At the same time, the Finance Minister proposed a hike in the limit of foreign direct investment in banking companies from 49 per cent to 74 per cent, "to facilitate setting up subsidiaries by foreign banks and for attracting investments in private sector banks."

There is also a move to lift the cap on voting rights from the extant 10 per cent. It means a foreign bank or any foreign group can buy up to 74 per cent into any Indian private sector bank, though the option is denied to Indian players.

Is this fair and what's the rationale in keeping out Indian players including government-owned banks? This is apart from the confusion over the split between FIIs and FDIs in the total equity of a bank.

Also, the Finance Ministry and RBI will be hard pressed to explain the cap of FDI and portfolio investment in nationalised banks and SBI to 20 per cent.

Under the RBI guidelines on entry of new private sector banks, January 22, 1992, some eight applicants were granted entry. At present, except for ICICI and HDFC, others are just about functioning with GTB still in trouble.

The word is going round that GTB may be picked up by a government bank with the blessings of New Delhi, though there is nothing official about it.

At one time, there was talk of merging the small banks in Kerala into one entity as all privately concede that the old private sector banks will not be able to last the distance. Most of the new private sector banks are no different.

Too many banks dot the country when the need is to reduce their number. In the event, is there any need for more banks when the RBI is finding it tough to regulate and supervise the present banking system?

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