S Murlidharan

Regulators, get serious

S. Murlidharan | Updated on March 09, 2018

The RBI and SEBI should apply their respective ‘25 per cent’ norms more seriously.

The Reserve Bank of India, some believe, has been harsh on new banking licence applicants. How could it insist as a precondition that at least 25 per cent of the branches should be located in rural areas, they argue. Why push them into the rural backwaters where banking is conspicuous by its absence, is their refrain.

Already, the existing private banks are having to offer more by way of interest in order to woo customers away from public sector banks, perceived to be a lot safer. The higher cost of borrowings vis-à-vis the public sector banks, coupled with huge losses from rural outposts, would ring the death knell of these Johnnies-come-lately.


This rural stipulation would make the new applicants lose their appetite for banking licences which they were running after till the other day. The concern is neither misplaced nor exaggerated but, at the same time, the RBI cannot be faulted for stipulating it.

But where the RBI seems to have erred is in not asking the existing banks also to fan out into the unglamorous and potentially loss-generating rural backwaters. This way, it could have warded off the charge of being partial towards the existing banks, while being harsh on the new ones. The existing banks could have been given a three-year breather to achieve the 25 per cent norm, which they would have set out to achieve by relocating some of their urban branches to rural areas.

Indeed, that makes sense, as opposed to the other option of opening fresh rural branches. It makes sense to shift 25 out of the 125 urban branches a bank has to rural areas and achieve the 25 per cent norm, rather than achieving the same result by setting up 42 fresh rural branches on top of the existing 125 urban branches.

Apart from staff utilisation, it would also decongest the urban ‘bankscape’, which is an eyesore. Earlier, there would be one bank street in a city. Now there are several bank streets, as it were. Such branches seem to be springing up in a spirit of ‘me-too’, rather than as a result of an objective analysis of whether they are needed. Starting an ATM on an impulse is one thing but doing the same with a bricks and mortar branch is quite another.

Existing banks would perhaps see wisdom in doing a branch-wise profitability analysis and shifting the losing urban branches to the rural areas — should the RBI urge them to fan out, as it indeed should, in order to bring about a parity between the new and old banks.

Critics aver that there is no point in asking unwilling banks to set shops in rural backwaters. In any case, they might argue, rural banking should be fostered more through para-banking which the extant banking correspondent model is all about.

Banking is one infrastructure whose absence is holding back the nation’s progress. It should therefore be viewed as an investment every bank has to make, unmindful of the bottomline.

L’affaire Sarada Chit Fund has brought into prominent relief the dangers of leaving rural folks severely alone, untouched by the banking habit. The RBI should prevail upon the Finance Ministry to grant a ten-year tax-holiday to rural branches to be chosen from out of the initial 20 years, a la the tax holiday given to expressway projects.

25 per cent norms

The 25 per cent norm seems to be a magic figure. The wily Jet Airways promoter Naresh Goyal has wangled a huge foreign investment from Etihad of around Rs 2,000 crore, in return for surrendering a 24 per cent stake. He hasn’t utilised fully the 49 per cent FDI allowed by the government.

That Etihad has meekly settled for a 24 per cent stake has surprised many, because it takes a minimum of 26 per cent to flex one’s muscles in the boardroom as well as general meeting battles. Given the fact that a special resolution, often required for important items on the agenda, requires a three-fourth majority, it takes a 26 per cent stake to vest oneself with the dubious power of playing the spoiler. That Etihad has not even sought the spoiler role may baffle a few, but a deeper reflection would show that it has amply compensated itself by wangling a lion’s share of gulf traffic coming the Indian airline industry’s way.

Talking of 25 per cent equity, a deadline is staring the listed companies in their face — June 30, 2013, by which the public stake should go up to this magic figure. In a weak market, promoters are chary of making fresh public issues as well as an offer of shares from their holdings. A few intrepid entrepreneurs have seized the trust route with two eager hands.

These trusts have come to own the excess shares in promoters’ hands. But come to think of it, this is just a sleight of hand, given the fact that trusts in India are the handmaidens of their authors.

Of course, the dividend income would go to the trusts, but they would remain puppets with strings in the hands of the authors and their associates. In other words, the 25 per cent ownership norm may well be achieved, but 25 per cent of control may not be with the public shareholders.

Both, SEBI and the RBI should address their respective 25 per cent norms more seriously.

(The author is a New Delhi-based chartered accountant.)

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Published on May 01, 2013
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