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.
Keywords: RBI, Banking sector, greater supervisory powers, legislative amendments, Parliament, new banking licences
Comments:
Yes ,big corporates can be short sighted ,but as Dr Raghuram suggested,Experiments need to be done in large country like us,as was done in bangladesh and kenya.Immediate is licence for SKS microfinance to focus exclusively . women, and small farmers
Secondly,govt company,IFCI to specialise and focus on small and medium enterprise in tier 2 to 5 towns/villeges.
WhatRBI insists is right in the matter of consideration of issuing of licenses. As it is,the Govt's interference in Banks'functiong has exceeded the tolerance limit as the Govt has been found issuing directions and exhorting banks to dance to its tunes ignoring the RBI which has earned a name forkeeping the banking system very sound and stable.TheGovt'ssupremacy needs to be restrained and as far as banking is concerned it is ideal and prudent to leave it to Reseve Bank.RBI never ignores Govt's ispectnterests and econy's needs and it always tries to strike a fine balance.In case the licenses go to corporates,the history of banking of the 1960s will definitely repeat and the economy will suffer and the Govt and RBI will have to regret.RBI knows the pulse of the economy and the financial system more than the Govt andfor this reason alone,the Govtshould allow RBI to have its say and approach in the matter of grant of Licenses.RBI has earned a unique place for its competence and integrity.
If finance ministry is confident that an amendment is not necessary to ‘give’ the powers sought by RBI (which include powers to supersede the board, to authorize the acquisition of shares beyond five per cent as well as powers for consolidated supervision and dispensation necessary to deal with companies that entered the banking sector), for approving new banks, why not convince RBI about the position? Why FM is announcing to the media that the ministry has ‘written’ to RBI to receive applications and start processing? How can any genuine promoter submit an application without knowing the regulatory environment in which the new bank will be functioning, in the first place?
Statutory bodies like RBI should not be made subservient to the whims and fancies of officials in ministries for exercising the powers they are expected to exercise as part of their mandated functions. RBI has faced problems on such issues relating to banks earlier and credibility of FM is not at a high level.
If finance ministry is confident that an amendment is not necessary to ‘give’ the powers sought by RBI (which include powers to supersede the board, to authorize the acquisition of shares beyond five per cent as well as powers for consolidated supervision and dispensation necessary to deal with companies that entered the banking sector), why not convince RBI about the position?
Statutory bodies like RBI should not be made subservient to the whims and fancies of officials in ministries for exercising the powers they are expected to exercise as part of their mandated functions. RBI has faced problems on such issues relating to banks earlier due to blurred clarity in powers and interpretation of law. Even today a ten year old pension updation issue is shuttling between RBI and finance ministry on such grounds.
Governor of RBI should continue to stand firm against the pressure exerted by GOI.We are all behind him ,in support. The threat of "oligoploy"( that is supposed to be the result if new licences are not granted) handed out by PMEAC is only a perception !
Further,this is not the opportunate time to set up new banks because of global recession, forex volatility, domestic economy not doing well and rising NPAs.
New banks(when set up) will take their own time to open branches in unbanked centres or provide credit to SME/Agri sectors, not to speak of financial inclusion. But this cause can be expected to be served more fully by existing banks rather than apportion a part of it to new banks and face shortfalls.
The market forces do not seem to suggest any urgent need for more number of players either.
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