Money & Banking

Economic Survey for full banking licences for business houses

Priya Nair Mumbai | Updated on March 03, 2011

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Industrial houses, business houses, and non-banking financial companies that wish to promote banks may be allowed full banking licence with adequate provision for avoiding conflict of interest issues, suggested the Economic Survey 2010-11.

The Survey, which was tabled in Parliament on Friday, suggested having two types of licences ? one for providing basic banking to fulfil the obligation of financial inclusion and the other for full banking encompassing all activities of a commercial bank.

While micro-finance institutions could be considered for being given licences for basic banking, it is very essential that the basic banking functions are clearly and objectively defined, the Survey said.

While providing banking access, the issue of regulatory robustness for the banking sector should not be compromised.

"Therefore, the issue of providing eligibility norms for new entities to operate as banks is of paramount importance," the Survey said.

According to Mr Shanto Ghosh, Principal Economist, Deloitte, a lot of large business houses typically do all the activities that banks do. Hence, they can be given full banking licence and subject to the same kind of regulatory discipline as banks.

MFIs, on the other hand, provide only certain banking functions. So, they can be given basic banking licences.

"The rationale behind the Economic Survey's suggestion is perhaps to extend the regulatory oversight to such financial institutions. So, give them licences, but distinguish them from banks," Mr Ghosh explained.

The Survey also suggested that minimum capital requirement for banks should be graded.

Since banks have different kinds of loans, each category can be assigned different risk weights and the overall capital adequacy can be based on these risk weights, Mr Ghosh said. "This will provide greater insight into the kinds of activity that banks do. It is one more regulatory safeguard and it is an idea that is being looked at worldwide,'' Mr Ghosh said

With regard to the issue of requirement for foreign promoters in banking, the Survey said that foreign promoters with credible banking experience may be considered, provided they meet the fitness criteria. Also the principle of reciprocity could be applied to countries that have allowed Indian banks to expand in their jurisdictions.

The Survey also suggested that as banks grow in business, the promoters' control should decline and banks should be managed more professionally and independently.

Published on February 25, 2011

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