RBI may let banks offer specialised services

While the government is encouraging mergers among banks to create mega banks of international size in the country, a recent move by the Reserve Bank of India (RBI) will allow specialisation in the banking sector.

Under the proposed differential licensing policy, banks can opt to operate under a full-fledged licence or a limited licence. While the former will allow the bank to offer all services, a limited licence will restrict its operations to a specific area.

As a result, banks may opt to provide only wholesale banking operations or trade finance activities or financing of small and medium enterprises or export and import finance.

Under the new differential licensing policy, these are some of the categories in which the RBI may reorganise Indian and foreign banks based on their inherent strength in these areas.

Though the policy has been aimed at new Indian and foreign banks, existing banks, which want to specialise and cut down risk and capital costs, can also avail of these new norms.

Under the differential licensing policy, the RBI will offer licence to the bank depending on its activities. If a bank opts for only investment banking, it will be awarded the licence only to conduct investment banking. The cue has been taken from similar practices observed in Canada, Singapore and China, said sources. The RBI proposes to put out the guidelines on differential licensing policy shortly.

This restricted activity, the sources said, might limit banks' reach on deposits. Unless a bank involves itself in retail banking, it will not be allowed to tap retail deposits. Similarly if a bank restricts itself in wholesale banking, it may accept only corporate deposits in the form of certificate of deposits.

Moreover, the capital requirement may not change since banks will have to adhere to the capital norms in line with asset quality under the Basel recommendations. This will be the norm after the implementation of the Basel-II norms, irrespective of the category of banking they choose.

Following restrictive banking, the RBI may make the priority sector norms optional for the banks, which will free the banks from the obligation to fulfil the priority sector norms. Out of the entire range of activities under the priority sector, only exports may be the priority sector for a bank specialising in export and import. Currently, export credit does not form part of the priority sector credit for domestic banks.

The requirement for fulfillment of the priority sector obligations may be cut down from the present level of 40 per cent net bank credit, said the sources.