Reserve Bank of India has issued its Draft Guidelines for issue of new bank licenses in India in the private sector. In a circular issued on 29 August 2011, RBI has invited comments from various stakeholders. Final guidelines will be issued after receiving feedback from the public and subject to some amendments to the Banking Regulation Act.
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What are the salient features of the RBI’s Draft Guidelines?
However, RBI may issue a maximum of only five to ten licenses. |
Who are the likely aspirants for the licenses?
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When are the new bank licenses likely to be issued by RBI?
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What are the amendments needed for the Banking Regulation Act?
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Who will benefit once new bank licenses are issued?
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What is the Background?
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Raising the bar (Editorial from The Hindu ) |
The Reserve Bank of India took a measured step towards licensing new private sector banks by releasing a set of draft guidelines on Monday. The central bank's concerns on licensing-related issues have been evident right from the time the Finance Minister mooted the idea in his February 2010 budget speech; unsurprisingly, these find expression in the guidelines. Allowing private players to start banks has always been a sensitive issue in India's recent history. More so when it is seen to benefit large industrial houses and business groups, whose questionable practices in banks they owned were one of the justifications for bank nationalization that began in 1969. RBI Governor D. Subbarao was airing a widely held apprehension when he said recently that the “gaps” in the existing regulations could lead to corporations “self-dealing” in banks they promote or using them “as a private pool of readily available funds.” The limited attempts at licensing new private banks through guidelines issued in 1993 and 2001 do not offer any valuable lesson for current policy making beyond the quite obvious fact that only banks with sound promoters do succeed. The RBI has therefore done well to insist on “sound credentials”, “integrity”, “diversified ownership” and a 10-year track record. Prospective promoters should not have even a 10 per cent exposure to real estate and broking businesses. That is ostensibly meant to keep out those from “speculative” sectors. The stipulation that a new bank can be set up only through a wholly owned non-operative holding company is an important safeguard designed to ring fence the bank and its depositors from problems in related entities. Necessary amendments to the Banking Regulation Act 1949 will be carried out to remove the restriction on voting rights while concurrently empowering the RBI to approve acquisition of shares/voting rights of 5 per cent or more by persons who are “fit and proper.” The RBI will get sweeping powers, for instance, to supersede the bank's board in certain cases. The minimum capital requirement is fixed at Rs.500 crore and the capital adequacy ratio at 12 per cent. New banks will have an up-to-date technology platform from day one and ensure that every fourth branch is located in rural areas. Furthering financial inclusion is one of the main reasons for licensing new banks. It is likely that only a small number of applicants will qualify and fewer still will be able to get the licence from an RBI-appointed expert committee. The central bank has said that silences will not be issued to all those who qualify. It is clearly not about to open the floodgates. |
Conclusion
The amendment to Reserve Bank of India's new Licensing policy for the opening of new bank branches is a good move provided it paves way for an economy which is viable and the banks still customer friendly. This amendment is a further simplification of the earlier commitments which the Finance Minister has told in the parliament on 31st. March, 2010. The minimum capital required for starting a new branch is also a welcome measure which can lead to branches opened at many places. The Central Bank's guidelines for the wholly-owned NON - OPERATIVE HOLDING COMPANY registered with it is a good move. Further requirement of 25% of branches in rural areas is also a boon to the industry and promotes banking to the down-trodden of the society. Over all it is a welcome move.
For financial inclusion, banks’ network has to go rural. We all know that it takes quite a few years to make operations of bank branches profitable in semi-urban and rural areas and hence all banks, whether in the public sector or private sector are not at all eager to go rural. In all likelihood, therefore, new bank licences may not serve the objectives of enhancing the financial inclusion and widening the banking network. In this connection it may be pointed out that to increase the rural telephone and broadband network, the Union Ministry of Telecom has set up a fund called Universal Service Obligation Fund, a similar fund can be set up to meet initial losses of newly opened branches of banks in semi-urban and rural areas.
Abbreviations: SEBI – Securities and Exchange Board of India, IRDA – Insurance Regulatory and Development Authority, PFRDA – Pension Fund Regulatory and Development Authority, FDI – Foreign Direct Investment, FII – Foreign Institutional Investor, and NRI – Non-Resident Indian.
Sources: RBI website