Empowering the RBI must precede liberalising norms for entry of new players in the banking sector, rather than the other way around.

The Government should push through the necessary legislative amendments in Parliament, granting the Reserve Bank of India (RBI) greater supervisory powers over banks, before expecting new banking licences to be issued to private sector players. The logic for this is simple. The responsibility for inviting and screening applications for setting up new banks along with granting of the licences lies with the RBI. On the other hand, the ones to have shown maximum interest in promoting banks today are corporates. While there is nothing wrong per se in that, the RBI – also being the overall banking sector regulator – is keen to see that such banks maintain an arm’s length relationship with the promoter group entities and business associates. Also, since banking – unlike say, establishing a steel plant or petroleum refinery – primarily involves handling of public (i.e. depositors’) money in far greater volumes than the latter, adequate safeguards are required to limit banks’ exposure to their promoters’ other businesses and ensure any such dealings are subjected to approval by the boards.

All this, in turn, also demands vesting the RBI with overriding regulatory powers, including superseding the boards of banks that are seen as not protecting depositors’ interest. The RBI has sought these powers through specific amendments to the Banking Regulation Act. While the Government has agreed to get these passed in Parliament, it has, however, asked the RBI to proceed with finalisation of the guidelines and even receive applications for new bank licenses “in anticipation” of the Act being amended. That clearly amounts to getting the sequence wrong. How can the RBI be sure of the Government getting both Houses to agree – that too, in the current political atmosphere? The Government should do its job first, of taking the Bill through Parliament, before asking the RBI to initiate the process of inviting applications.

It can, of course, be argued that the RBI can, even with its existing powers, supervise the banking industry – which it has, indeed, done fairly well in recent times. After all, did it not manage to avert bank failures in the case of Global Trust Bank, Nedungadi Bank and Bank of Rajasthan, by engineering their merger with healthier banks? But that misses the point. The fact is that since 2003 – when Kotak Mahindra and Yes Bank were granted licenses – not a single new bank permit has been given. The RBI has all through been maintaining that it needs to be empowered suitably before licensing new banks, especially those promoted by large corporates who should not be allowed to view them as captive fund pools. If the Government was really keen that new banking players be allowed – which it still is – there was nothing stopping it from amending the banking regulations as desired by the RBI. It can still do so, rather than try and browbeat the banking sector regulator.

(This article was published on November 16, 2012)
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