The Reserve Bank of India (RBI) must be watchful of possible conflict of interest and related-party lending while giving bank licences to non-bank finance companies (NBFCs), credit rating agency Moody’s Investors Service said on Monday.
The main objective of RBI encouraging expansion was ensuring financial inclusion, stability and soundness, which would all contribute to economic growth, it said. Licences to NBFCs that might have possible conflict of interest and indulged in related party-lending could undermine the purpose of banking expansion, it said.
RBI last week came out with a discussion paper on giving licences for new banks.
Potential bidders, the financial community and the public at large can give feedback to the central bank by September 30. The regulator gave licences for new generation private sector banks in 1993. It last gave a banking licence in 2004.
The regulator might increase the minimum capital required for a new bank to Rs 500 crore or even Rs 1,000 crore from Rs 200 crore, it said. This would attract only serious players and thus play a more meaningful role in the market, Moody’s said.
“We expect active large NBFCs that are part of financially strong Indian industrial groups to be able to meet such criteria and have a competitive advantage compared to other interested candidates because of their financial expertise and existing customer base,’’ it said.
An increase in the number of banks was likely to reduce costs, promote efficiency and improve quality of service, though over the medium term, because of increased competition, margins might shrink, the credit assessor said. While new banks would expand banking services, they would also keep competition from foreign banks under check, the report said.
The new entrants may not change the banking landscape, which is dominated by the 27-odd public sector banks that dominate with 70 per cent assets.
