The wait is getting longer for draft guidelines for new banking licences. The Reserve Bank was supposed to issue the draft few days ago. Now it has gone on record to say that until and unless the Banking Regulation Act is amended, the new licences are unlikely to be issued.

In a freewheeling interview with Business Line, Mr Ashwin Parekh, National Leader (Global Financial Services), Ernst & Young, feels that this wait may help in creating a strong environment for the banking sector .

Excerpts from the interview:

It seems corporates will have to wait longer to get new banking licence; is this wait justified?

After the RBI Governor's reference last week, it might take some more time.

What you may say from the references made by the regulators and after the discussions with the Ministry of Finance, one gets the impression that there would be some waiting involved before we see the new policy on banking licences.

The reference made to the amendment of the Banking Regulation Act is very relevant in this regard.

There will be other provisions required under both the Reserve Bank of India Act and the Banking Regulation Act to ensure that the regulator can closely monitor the shareholding of the banking companies once they are licensed.

I would like to draw attention to the examples in the recent past, in regard to Bank of Rajasthan and United Western Bank. It looks, therefore, that there will be some waiting involved before the new guidelines are announced.

A little delay in issuing banking licences will help in creating a stronger environment.

It seems some sectors will not be given new licences. The Government and the RBI have hinted that realty may be one of them. In your opinion, which other sectors should be kept out and why?

Financial services, and in particular, banking business are very different from the manufacturing and services in other sectors which the corporates are familiar with.

Despite their best intentions, they have to understand that getting into banking industry is a larger responsibility.

Businesses which are prone to the market risk arising out of cyclical economic factors are perhaps worst suited for getting into banking business.

Therefore, those corporates that have concentration of risk by virtue of having large exposure to few businesses and whose asset portfolio is not well diversified are better off keeping away from this sector.

Also, corporates engaged in sunrise sectors may also reconsider seeking presence in the banking sector.

However, diversified conglomerates with sound governance track record should seriously look at getting into this sector. They will not have deep pockets but, most significantly, a bent of mind to serve the economy.

The Finance Ministry and the RBI seem to agree on 49 per cent cap for foreign direct investment. Do you think it is sufficient?

Considering that the Foreign Direct Investment route would be open only to non-banking company investors and also given the fact that the new banking companies will be required to make commitment to inclusive banking, the 49 per cent cap should be there for the first five years.

Subsequently the promoters could be allowed to increase it to 74 per cent.

Keeping the capital requirement in mind, what should be initial-paid up capital for new banks?

Once again, we should examine the aspect in regard to the kind of banking that would be permitted to the new entrants. They would require sizeable capital, at least Rs 1,000 crore to begin with. An ability to increase capital by another Rs 1,000 crore in a span of following three years may be very essential. If we evolve a separate order of banking for regional and community activities, then perhaps the capital requirement could be less; however this seems unlikely.

There are two extreme view — one says banking industry should go for consolidation while other believes that more new licences should be given. How do you co-relate these two?

Considering the references made by the regulators in the recent past, it now appears that the Government should seriously look at the consolidation route. To my mind, there is larger scope for consolidation with the public sector companies, if it is managed well.

There seems to be delay on two other major reforms, insurance and pension, in the financial sector. What sense are you are getting from the foreign investors?

Considering that the Government's mind is preoccupied, these reforms have been pushed back for a while.

I am sure that foreign investors may be getting more impatient, but it looks like they will have to wait.

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