Will new banks be a gamechanger?

After a hiatus of well over a decade, when no new private sector bank was licensed, the Reserve Bank of India (RBI), on February 22, 2013, set out final guidelines for the licensing of new private sector banks. Unlike in the past, the new guidelines permit industrial houses and other business groups to also apply for a bank license.

The RBI has undertaken a systematic consultative approach and deserves kudos for coming out with comprehensive guidelines on an intricate subject.

Key Guidelines

The eligibility for setting up new private banks is broad-based—entities/groups in the private sector, entities in the public sector and Non-Banking Finance Companies are eligible to set up banks through a wholly owned non-operating financial holding company (NOFHC).

The NOFHC will be wholly owned by the promoter/promoter group. The initial paid-up capital of the bank would be a minimum of Rs 500 crore and the NOFHC is required to hold a minimum of 40 per cent of the paid-up voting equity capital, which would be locked in for a period of five years; this shall be brought down to 15 per cent within 12 years and the bank has to get its shares listed within three years of commencement of business.

If these stipulations are to be enforced for the newly licensed banks, banks which were set up on the basis of the 1993 and 2001 guidelines should also be required to adhere to these guidelines. In order to ensure transparency, the names of all applications for bank licences will be placed on the RBI website after the last date for receipt of applications, viz. July 1, 2013.

A key objective would be to foster financial inclusion. One of the advantages of industrial and business houses being eligible to apply for licences is that many of them have a reach down to the village level.

Misuse of Funds

There are visceral memories of the pre-1969 scenario wherein business houses pre-empted bank credit for their own use.

With strong regulations on connected lending and stipulations on concentration ratios, the pre-1969 situation is unlikely to emerge. While granting licences to industrial and business houses there could be an added stipulation on a total ban on lending to any unit in the industrial/business house, however, remotely connected.

Furthermore, any compensatory lending by two banks to each other’s group companies should invite heavy penalties and harsh administrative measures.

The guidelines stress that all applications meeting the eligibility criteria may not be granted licences. There should be transparency in assessing the strengths of each application with reference to the basic objective of working towards financial inclusion.

There is no particular virtue in a pre-determined number of licences, and it is better to have an open mind on how many licenses are to be issued.

Number of New Licences

It would be best for the RBI to take a view after the list of applications is put in the public domain after July 1, 2013.

The RBI should first undertake an in-depth examination of all applications, and only thereafter should the High Level Advisory Committee be set up.

The Advisory Committee should evolve its own procedures and after taking a view on all applications should it finalise its advice to the RBI. If this is properly done it would take a year or more from now.

The government has fast-tracked the setting up of a public sector All- Women’s Bank and it is targeted to start operations with six branches by November 2013. While this could make for terrific grandstanding, undue haste could be detrimental to the basic objective.

The M.B.N.Rao Committee should examine whether the new bank should be yet another public sector bank, albeit with a mandate of being managed by women for women, or should it be an oversight agency to monitor operations of all banks relating to women and whether the new banks should also be a refinancing agency?

For instance, the oversight agency could require all banks to convert at least one per cent of their branches in a period of one year to all-women’s branches operated by women exclusively for providing credit to women.

This way, about a thousand all-Women’s branches would be set up in a year. It would take a public sector Women’s bank decades to set up a thousand branches.

The M.B.N. Rao Committee Draft Report should be put in the public domain for a short while before the Report is finalised.

Postal Bank

In contrast, the proposal for a Postal Bank has been languishing for the past 25 years. If the authorities are committed to financial inclusion, the Postal Bank proposal should be fast tracked for being set up in 2013-14.

While it is the fashion of the times to go in for international consultants to prepare a project report, the authorities should associate Indian consultants with experience of dealing with the Post Office.

It is hoped that the recent initiatives could be a game changer for commercial banking to genuinely reach out to hitherto neglected segments of society.

(The author is an economist. blfeedback@thehindu.co.in )

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