Banking on circumspection

Quietly yet self-assuredly, the Reserve Bank of India has released its draft guidelines on new bank licences for the private sector after a gap of more than a decade. The guidelines offer a vital clue to the RBI's world-view on the subject: in a word, selectivity. As the RBI warns: “Banking being a highly leveraged business, licences shall be issued on a very selective basis to those who conform” to the norms but “it may not be possible for the Reserve Bank to issue licences to all the applicants meeting the eligibility criteria…” This is confusing; an eligible applicant is entitled to go ahead unless the RBI explains at the outset why it is “not possible” to let the candidate through the gate.

The criteria are severe and represent the concern to safeguard the banking sector from the slings and arrows of private enterprise and foreign majority holding. Only firms with “diversified ownership”, a successful track record of 10 years, owned and controlled by resident Indians, less than 10 per cent exposure to real estate, construction or capital market activities, and able to cough up Rs 500 crore will be permitted to apply through a Non-Operative Holding Company (NOHC) that, for the first five years, will have to hold at least 40 per cent of the paid-up capital; aggregate non-resident ownership in that period will not be allowed to exceed 49 per cent. Bowing to the mantra of financial inclusion, the RBI insists that one in every four branches will have to be set up in rural and semi-urban areas. The guidelines insist, unlike the earlier rules, that new entrants list within two years and that half the directors be independent; this may not necessarily keep promoters' biases at bay but, then, the RBI tries to ring-fence the new entity, especially where “promoter groups” have 40 per cent or more assets or income from non-financial business. In this case, the guidelines insist on aggregate exposure of not more than 20 per cent of paid-up capital and reserves of the bank to any entity “in the promoter group, their business associates, major suppliers and customers”; and all “exposures will have to be approved by the Board and all credit facilities to these entities should have a minimum tangible security cover of 150 per cent”.

Last week, Dr Subbarao sounded the tone when he warned of the need to prevent private entrants from using banks as “private pools” of capital. The draft guidelines aim to do just that while giving new entrants enough leeway to participate in an industry bristling with business opportunity.

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