The Hindu Business Line : `Differentiated bank licensing proposal, an encouraging measure'

Chennai May 1 In its Annual Policy Statement for 2007-08, announced last week, the Reserve Bank of India has tossed the idea of a graded approach of licensing for domestic and foreign banks.

The stated aim of the central bank in this regard is to direct the resources of banks to their niche areas and to sustain efficiency in the banking system.

The RBI has mentioned that differentiated licensing procedure for banks is an accepted practice internationally. "While in some countries there is no discrimination between domestic and foreign banks in regard to licensing policy, in others separate norms exist. In India, there is no differentiated licensing policy between domestic and foreign banks as the regulatory regime for domestic and foreign banks is non-discriminatory," reads a snatch from the Statement. The RBI is expected to issue a technical paper on this subject by May 31, for comments/suggestions from the public.

Meanwhile, Business Line sought the views of Mr Sanjay Aggarwal, National Industry Director, Financial Services, KPMG, on the `differentiated licensing' proposal. "An encouraging measure," he says. "Scarce financial resources are likely to be utilised more effectively by niche players with significant depth in core activities."

Mr Aggarwal, a chartered accountant, handles clients such as Citibank, Edelweiss Capital, HSBC Group & Muthoot Group. He has been involved in the audit of banks such as ANZ, Citibank, Emirates Bank, Habib Bank and BCCI Bank during 1987 to 2001, and his key areas of experience include audit, due diligence and management assurance services mainly in the banking and financial services sector.

Here are Mr Aggarwal's answers to a few questions on `differentiated licensing'.

What does the proposal mean?

Pending further details in respect of the differentiated bank licences, it could perhaps mean that banking licences would be differentiated on the basis of core activities. For instance, some banks may be granted wholesale banking licence under which they can offer loans to corporates and accept corporate deposits, but cannot accept retail deposits.

How would it impact banks?

Banks will have to make strategic choices instead of trying to be present in many segment and or markets. It will be a good idea to open up financial sector to niche players who can help develop and grow certain areas such as debt markets, infrastructure finance and mass banking.

On the system in practice elsewhere.

Differentiated bank licences exist in the developed markets. For instance in Singapore, there are five types of branch licences — full bank, qualifying full bank (QFB), wholesale bank (WB), offshore bank, and representative bank.

A full bank conducts a whole range of banking business for retail and corporate clients, but foreign banks in Singapore are restricted when it comes to branch expansion and expansion of ATMs. The QFB is for foreign banks in Singapore where it allows them to have additional branches or off-premise ATMs and share ATMs amongst themselves.

Wholesale banking licence, permits a bank to only have one place of business in Singapore and cannot operate savings accounts and Singapore-dollar fixed deposits of less than $250,000. The offshore bank licence allows banks to operate mainly in the Asian dollar market, foreign exchange and wholesale banking with non-residents.

Finally, the representative office licence prevents banks from conducting regular banking operations, but promotes business and correspondent banking business between their home offices and the region.

Another instance is Hong Kong which has a three-tier banking system based on licensed, restricted licence, and deposit taking companies.

Licensed banks may operate current and savings accounts, and accept deposits of any size and maturity from the public and pay or collect cheques drawn by or paid in by customers while restricted licence banks are principally engaged in merchant banking and capital market activities. Restricted licence banks may only take deposits of any maturity of HKD 500,000 and above.

Deposit-taking companies are mostly owned by, or otherwise associated with, banks. These companies engage in a range of specialised activities, including consumer finance and securities business. They may take deposits of HKD 100,000 or above with an original term of maturity of at least three months.

Overseas banks in Hong Kong may also establish local representative offices in Hong Kong. However, these offices are not allowed to engage in any banking business and their role is confined mainly to liaison work between the bank and its customers in Hong Kong.

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