Somasekhar Sundaresan’s “Don’t get carried away by RBI’s paper” (Without Contempt, August 16) is an insightful article and provides a well-balanced view of the RBI’s discussion paper on new bank licences.
I have two points to add. One, the minimum capital requirement for new banks, which will be increased to Rs 1,000 crore over a period of time, is too low. New banks are likely to be far more risky and, given what happened in 2008 and beyond, warrant a far higher capital requirement at Rs 5,000 crore. If we can raise an obscene amount from selling 3G spectrum, what stops us from doing the same for banking licences? This may seem conservative. Well, banking is a lucrative business and though banks think that they can manage risk with “optimum” capital, the central bank should keep in mind that conservatism also implies a much higher capital for new banks.
Two, the new banks must be directed to specifically set aside and actually lend an amount equal to 40 per cent of their capital at all times to promote financial inclusion. The ingenuity of non-PSU banks is often measured by the amount of indirect lending to India’s top corporate houses and participation in bundled paper camouflaged as directed lending to small-scale industries and weaker sections. Unfortunately, the result of this skewed lending is visible in an Incredible India that leans on the top 500 corporate houses while the poor struggle to make an honest and decent living. A warped directed lending and financial inclusion policy has in many ways contributed to the emergence of the Red Corridor and caused angst in the common man.
Shrikant Rege, on email
