According to reports in the media, there is a difference of opinion between the Reserve Bank of India (RBI) and the finance ministry on the issue of capitalisation of new banks in the private sector. The RBI has been insisting on a minimum capital of Rs 1,000 crore, while the ministry has pegged it at half of this amount. The two also differ on the foreign direct investment (FDI) limit in new banks.
The question, however, is that why are issues of capitalisation and FDI limits being referred to the finance ministry? These are capital regulatory issues that fall within the ambit of the RBI. The ministry’s preference for a lower capital smacks of politicisation of the issue. The RBI’s fears that a lower capital would attract non-serious players and eventually jeopardise financial stability are justified. The finance ministry is not accountable for stability in the banking system and so its stand would tantamount to interference.
A number of business groups have already evinced interest in promoting new banks and so the ministry’s proposals are quite dangerous for financial stability. The ministry simply presents the idea of merging weak banks with stronger ones whenever there’s a threat to the financial stability of individual banks. This has happened in the past but the practice does not make sound financial sense for the banking sector.
K V Rao, Bangalore
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