The RBI would do well to remember that in the post-liberalisation era, banks promoted by public financial institutions alone have largely prospered.
Regulatory bureaucracies have a tendency to prefer equivocation rather than forthrightness while dealing with sensitive issues. The final guidelines of the Reserve Bank of India (RBI) on the entities that may be permitted to start a banking business are thus true to form in the resort to equivocation, although the earlier released draft norms hinted at the prospect of the latter. The RBI has said that corporates engaged in businesses that are “speculative in nature or subject to high asset price volatility” would not be allowed to set up banks under its final licensing guidelines issued last week. This rather general and loosely-defined eligibility criteria is in marked contrast to its draft guidelines for licensing new private sector banks released in August 2011. These had specifically mentioned real estate, construction and capital market (especially broking) activities as “inherently riskier” and “misaligned with the banking model”. Hence, corporate houses deriving 10 per cent or more aggregate income from such activities in the last three years would not be permitted to promote banks.
There can be no two opinions about the fact that banking, by its very nature, involves handling of depositors’ money and, therefore, has to be subjected to closer regulatory oversight than companies making steel, cement or sugar. It is also a fact that real estate and stock prices are more volatile than steel or cement, and the systemic risks to the banking system from an excessive exposure to the former are far greater than to the latter. There are enough grounds, then, to be cautious in granting bank licences to entities primarily engaged in real estate or broking, if only to prevent the prospect of depositors’ monies being funnelled into these businesses. If the RBI, in the light of the feedback received on its draft norms, felt that the denial of banking licences to those in real estate or broking business would be unfair, it would have been perfectly in order for it to delete it altogether.
By not singling out any particular sector and yet by insisting that the prospective bank promoters are involved in businesses “subject to high asset price volatility”, the RBI may well be in a position to do what it wants without saying in so many words. But then it would only be exposing itself to political pressures and attempts at arm-twisting by powerful vested interests when it comes to the actual grant of licences. One hopes that these norms as finalised are good enough to effectively exclude those whose activities are “misaligned with the banking model”. However, a note of caution would not be out of place. The RBI would do well to remember that, with the possible exception of one or two, only banks promoted by strong public financial institutions have survived among the initial crop that were granted licences in the post-liberalisation era.
Comments:
The concept of issuing broking license to Banks ignores definition of Banking.
How Banks can divest their capital which is due to depositors money, stake holders in to subsidiaries engaged in non banking activities. It invites conflict of interest.
Banks needs to open branches in rural, unbanked areas, financial inclusions which are customers friendly, One side govt spends tax payers money ,infuses capital into Banks ,other side Banks are allowed to divest their capital.for subsidiaries.
Allowing Banks in to other activities shall invite trouble for depositors, stake holders.
very well written.was a delight to read, both from the perspective as
well as language. though concluding remark seems stale... India has
changed tremendously in last 20 years, no point judging performance of
the banks, which were issued licences in historical times.
Banking is a risky business. prudence etc will differ and depend upon the region it operates. Instead of opening new banks- Banks may be allowed to bring in new investors if and only its Capital base is expanded to a minimum of three times. PSU Banks must be held tightly under State Umbrella to tide over the crisis if any , done by these Private sector and Foreign Banks- Bank Failure is a legacy of American continent for past two centuries. British Banks are stable as our PSU Banks. . Maximum we can explore the possibility of giving State Gurantee (can be provided for PSU Banks ONLY) to borrow from Overseas for short term lending . This short term lending can be only at Agriculture . If this is done, we can have one more Green revolution. No suicides. Farmers other than large and Corporates Farmers , may enjoy low Interest or Nil interest rate No question of level playing crying , if this is done, since Agriculture do not ahve level playing with Industry .
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