The Hindu Business Line : `Enough liquidity for banks to raise funds'

THE Reserve Bank of India has been, on an average, absorbing $8-10 million of excess liquidity a day in the recent past, according to the Deputy Governor, Dr Rakesh Mohan. Addressing a seminar on Thursday on the proposed guidelines on the ownership of private banks, Dr Mohan said there was no dearth of capital in the country and banks will not find it difficult to raise finances to meet their fund requirements. As of now the unused resources in the country stood in excess of $20 billion.

"Most companies that have gone to the capital markets with IPOs in the recent past have seen their offerings subscribed within a matter of hours. Therefore, the argument that there is not enough capital does not hold good, he said, speaking at a CII seminar on `Ownership and governance of private sector banks'.

On July 2, 2004, the RBI had issued draft guidelines on ownership and governance in private sector banks. The guidelines that were placed in the public domain for wider debate and feedback have two key aspects.

The first is that all shareholding of 5 per cent and above representing important shareholding will have to meet the `fit and proper' tests of competence, reputation, track record, integrity, satisfactory outcome of financial vetting, source of funds and so on. The second, that in the interest of diversified ownership of banks, the objective will be to ensure that no single entity or group of related entities have shareholding or control, directly or indirectly, in any bank in excess of 10 per cent of the paid-up capital of the private sector bank. Any higher level of acquisition will be with the prior approval of RBI.

Explaining the central bank's rationale on these guidelines, Dr Mohan said owners and shareholders of a bank act as trustees and therefore it must be fit and proper for the deployment of funds entrusted to them.

"The sustained stable and continuing operations depend on the public confidence in individual banks and the banking system. The speed with which a bank facing a run can collapse is incomparable with any other organisation. For a developing economy like ours there is also much less tolerance for downside risk among depositors many of whom place their life savings in the banks", he said.