Door open for corporate houses

Survey proposes introduction of two types of banking licences, grading of minimum capital requirements.

The Economic Survey has added to the excitement surrounding new bank licences by supporting entry of corporate and business houses, non-banking finance corporations (NBFCs) and microfinance institutions (MFIs) in the banking sector.

The survey has proposed introduction of two types of licences for setting up new banks in India, one for basic banking facility and the other for full-fledged banking. “Having two types of licences, namely one for providing basic banking to fulfill the obligation of financial inclusion and the other for full banking encompassing all activities of a commercial bank could be considered,” the Economic Survey said.

While the government favoured offering “full banking licence” to industrial and business houses, and some NBFCs, it said microfinance institutions and other NBFCs should be given licences for basic banking services only. The report also suggested minimum capital requirement for banks should be graded.

“It is very essential that the basic banking functions are clearly and objectively defined,” the report said without detailing further.

Following Finance Minister Pranab Mukherjee’s announcement during last year’s Budget, the Reserve Bank of India (RBI) is now preparing the draft guidelines for allowing new entities in banking. In the discussion paper on the entry of new players in banking, the central bank had highlighted the pros and cons for allowing entry of industrial houses in banking. The first guidelines for licensing of new banks in the private sector, after the financial sector reforms, was issued in January 1993 and then revised in 2001. The 2001 guidelines were still cautious in nature and large industrial houses were not permitted to promote new banks.
 

NOT BRANCHING OUT ENOUGH?
March 31, 2010	Branches Rural	% of rural  to total	Branches Metro	Total
State Bank Group	5,915	34.33	2,782	17,229
Nationalised banks	13,652	32.82	8,961	41,596
Private sector	340	6.69	1,732	5,075
State Bank of India	4,678	37.61	1,887	12,437
Punjab National Bank	1,947	41.31	793	4,713
ICICI Bank	151	8.89	500	1,698
HDFC BANK	95	5.50	644	1,715
Axis Bank	44	4.55	292	966
Total branches include branches in rural, semi-urban, urban and metropolitan centres. Total scheduled commercial banks – 81, Public Sector – 26, Private sector – 21 and Foreign bank – 34

Companies such as L&T Finance, LIC Housing Finance, Reliance Capital, and Aditya Birla Nuvo have expressed interest in applying for bank licences. The report emphasised that the “regulatory robustness” for the sector will not be diluted even though it was keen on offering new bank licences to widen the reach of banking services.

It has suggested foreign promoters that have credible banking experience should only be allowed to invest in Indian banks and grading of minimum capital requirements for the lenders. The report also says that the principle of reciprocity could be applied to countries that have allowed Indian banks to expand in their jurisdiction.

“There is another important issue relating to minimum and maximum caps on promoter shareholding and other shareholders. One view is that as the bank grows in business, the promoters' control should decline and the bank (is) managed more professionally and independently,” the Survey said.