The Guv keeps the bar high

K. T. JAGANNATHAN  

D. Subbarao

It took nearly three years for the Reserve Bank of India (RBI) to give a final shape to the government’s decision to let more players in the private sector banking field. That by itself offers a clue to the divide in thinking between the fiscal and monetary managers of the Indian economy. When it did come out with guidelines for “Licensing of New Banks in the Private Sector”, the central bank has let it known to aspirants at large in unambiguous terms that banking is a no-nonsense, serious business, and that there cannot be any trust deficit.

Not surprisingly, the emphasis is on giving licences only to ‘fit and proper’ promoters. The past records, financial soundness and integrity, among others, of the promoters will be scrutinised by the RBI to assess the ‘fitness’ of the banking aspirants. It has even reserved the right to seek assistance from other regulators and assorted agencies to satisfy itself of the ‘fitness’ of the aspirants. This ‘fitness’ rider comes even as the RBI throws the banking field wide open to aspirants in the private sector that are owned and controlled by resident Indians and also to non-banking finance companies (NBFCs). This particular rider will have interpretational issues, and ensures that the central bank has the last word.

The global financial crisis has, in its wake, seen the always cautious RBI turn even more so. And, the guidelines reflect that concern. The Rs.500 crore capital stipulation, the insistence on floating a wholly-owned non-operative financial holding company, well-defined voting rights, requirement of filling up the board with independent directors and so on are all indeed required to ring-fence the bank from being manipulated by the owners.

Competition between a bank and an NBFC is one thing. But competition among banks is a different ball game in the fast-evolving global context, and in a compulsive domestic environment. Why would anybody enter into banking if they can’t make money? We have seen many big names which entered the private banking space earlier go into oblivion, subsumed by M&As . The environment has only turned tougher since then for banks, both from business point of view and regulatory angle.

The guidelines are anything but encouraging for NBFCs to convert themselves into banks. Most of these NBFCs have been largely sector-centric lenders, and are last-mile linkers to financial inclusion. For them, conversion into bank will mean they have to compromise on their core competence, and venture into non-specialised areas. After all, financial inclusion involves cost and associated risk. Banking per se is practiced as a low-risk business, especially in a highly regulated environment. And, as such, need not necessarily be the tool for financial inclusion.

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