There should be no hesitation in granting bank licences to industrial houses, provided they fully comply with all the guidelines and the banks are clearly ring-fenced.

Parliament passed the Banking Laws Amendment Bill, 2011, earlier this month. The regulators in the Reserve Bank of India (RBI) now have their task cut out.

From the time of the announcement in the Budget for February 2010 of the intention to issue private sector bank licences, to the enactment has taken a little less than three years. While the RBI should get down to business forthwith, it must be appreciated that the whole process is long drawn out and the new private sector banks, which would now be licensed, are unlikely to be operational before early 2015.

It was stultifying to expect sponsors to put up money for a new bank and have their voting rights severely restricted. The recent amendment provides for commensurate voting rights for the sponsor up to 26 per cent. The empowering of the RBI to supersede bank boards and to monitor the activities of other organisations within the business group is particularly relevant in the case of industrial houses which may be given a bank licence.

Sequencing of Measures

The RBI has had enough time to mull over the guidelines and should be in position to issue the final guidelines before the Budget of February 2013, and the actual process of receiving applications could start from April 1, 2013.

By April 1, 2013, the RBI should set up a High Powered Bank Licencing Screening Committee. Ideally, the Screening Committee should be a Panel of former Governors who would bring to the Table rich experience of dealing with an ordeal by fire. Such a Screening Committee would be better able to handle the political economy stresses and strains.

There is the unsettled issue of how many licences should be issued. Again, there is the question of granting licences to existing non-bank financial companies and industrial houses. The exercise should not be a one-time processing of a few licences and the whole machinery going into hibernation for a decade. The window for applying for a bank licence should be open at all times. As such, the Screening Committee should be a Standing Committee. A tradition should develop of the RBI accepting the recommendations of the Screening Committee and only in the rarest of rare cases should the RBI differ from the Screening Committee, and in such an event the RBI should set out a Speaking Order.

There should be no compromise on the initial minimum capital (Rs 500 crore) and the promoter’s share, initially say 40 per cent should be locked in for five years. In any subsequent issue the promoter should not be allowed to participate till the promoter’s share comes down to 26 per cent. There should be a stipulation on the timeframe for dilution of the promoter’s equity share, say five years. This should be non-negotiable as invariably the sponsor would cogently argue for more time to maximise capital gains. It is important that these conditions should apply mutatis mutandis to existing private sector banks.

Industrial Houses

There has been strong antipathy towards industrial houses being granted bank licences. This does have a historical background; prior to 1969 industrial houses used banks to their exclusive advantage. The situation in 2013 is vastly different and there are sufficient safeguards such as concentration ratios and connected lending. There should be no hesitation in granting bank licences to industrial houses, provided they fully comply with all the guidelines and the banks are clearly ring-fenced.

The Committee on Fuller Capital Account Convertibility (2006) was the first official Report to advocate the licencing of new private sector banks to industrial houses. To allay any fears of misuse of the bank by industrial houses, additional stringent stipulations could be placed on sponsors, such as a total ban on lending to any company directly or indirectly associated with the sponsor industrial house.

In India, we have crossed the Rubicon. Industrial houses have successfully set up non-bank finance companies, mutual funds and insurance companies; in this context it would only be logical to allow them to set up banks.

The existing banking system --- public, private and foreign --- would be vigorously against allowing industrial houses to set up banks; this is essentially because industrial houses would be able to set up strong banks which would give intense competition to existing banks.

Public Sector Sponsors

It is unfortunate that public sector units are being debarred from setting up new private sector banks. In these cases, it could be stipulated that even at the inception the sponsors would not be allowed to hold more than 26 per cent of the equity. Units, such as the Indian Oil Corporation ( IOC), the Oil and Natural Gas Corporation (ONGC) and the Life Insurance Corporation (LIC) have inherent capabilities for setting up strong and efficient banks.

It would be best to avoid undue haste in granting new bank licences. This is not a case for encouraging procrastination, but caution to ensure that due processes are followed. It would be no great loss if the first of the newly licenced banks becomes operational say in early 2015.

Disclaimer: The present columnist is not directly or remotely associated with any industrial house.

(The author is an economist.

(This article was published on December 27, 2012)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.