RBI likely to issue new bank license guidelines in 4-6 weeks

New Delhi: The RBI is likely to issue final guidelines for grant of banking licences to new players within the next 4-6 weeks, while those interested in setting up new banks, including giants like Reliance, Religare and L&T groups, have begun doing the groundwork.

According to sources in Finance Ministry, the Reserve Bank may release its final guidelines for new bank licenses by January-end or early next month. The Finance Ministry is currently in the process of sending its final comments to the RBI on the draft guidelines issued by the central bank on the matter, after which the final guidelines should be announced.

[caption id=“attachment_579462” align=“alignleft” width=“380”]  Industry sources said that most of the banking aspirants have begun doing their groundwork. Reuters[/caption]

The RBI is already in the process of collating the comments received from various stakeholders on the draft guidelines. RBI Deputy Governor Anand Sinha, who is incharge of the Department of Banking Operations and Development at the central bank, is scheduled to retire next month and RBI should finalise the norms before his retirement, sources said.

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A number of large corporate houses, including Anil Ambani-led Reliance Group, financial conglomerates Religare and Shriram groups, engineering-to-technology major L&T group and Aditya Birla group, are said to be interested in entering the banking business depending on the regulatory framework.

Industry sources said that most of the banking aspirants have begun doing their groundwork and quite a few large corporate houses are confident of meeting the regulatory framework despite some voices being raised in certain quarters about concerns of possible conflict of interest in case of industrial houses being given banking permits.

Last week itself, noted economist and Nobel laureate Joseph Stiglitz said corporates should not be allowed to enter banking space as it has the potential to create conflict of interests. However, experts back in India dismiss the concerns and say that bank licenses should be given to those who can safeguard the interest of consumers and ensure liquidity, irrespective of them being a corporate house or anything else.

“Bank licence should be given to promoters with strong track record and credence irrespective of being a corporate house or an NBFC, as depositors interest is paramount. RBI has guidelines in place which is best across the globe and is testified by the fact that very few banks have failed in the country,” said eminent Chartered Accountant S Ravi, who is on board of various public companies.

Noted economist and former Secretary General of apex industry body FICCI, Rajiv Kumar, also said a strong

regulatory framework can take care of the conflict of interest issue. “As long as there is high quality regulation, the apparent conflict between corporate interest and banking interest can be resolved and, I think, if corporates willing to get into banking sector can create a firewall between their corporate interest and financial interest it should be fine,” he said.

After delivering a lecture organised by the Reserve Bank of India in Mumbai last week, Stiglitz said the real problem in the financial sector were issues of conflict of interests. “And when you have corporates opening their own banks, you are opening a venue for conflict of interests,” he said. SMC Capitals’ Equity Head Jagannadham Thunuguntla said even the draft guidelines and discussion papers have enough safeguards.

“I believe RBI is one of the best regulator in the world. So in that sense corporates getting a licence is fine. Earlier Kotak had got banking license and they did well. So there is no problem with corporates getting into banking,” he said.

Stiglitz also praised the RBI for doing a commendable job in its management of banking regulations and said the need of the hour is not over-regulation but right regulation. He, however, said the argument of bringing ’economies of scale’ by giving licences to corporates did not hold water as the “dangers of conflict of interest outweigh any economies of scale that it can bring up.”

Drawing parallel between the debate in the western world regarding the conflict of interest with respect to separation of investment banking and pure banking operations, he said that a Chinese wall can not be created between the two.

Rajiv Kumar said the “criteria for eligibility should be a good track record and some minimum networth that they have and their some demonstrative ability to run a financial institution.” “So if they have done something in the insurance sector or the NBFC sector etc then they should be given a preference,” he said.

In a major step to reform India’s banking sector, the Lok Sabha last month passed the Banking Laws (Amendment) Bill, 2011, paving the way for establishment of new private banks among other measures.

The RBI had issued draft guidelines in August 2011 for issuance of new banking licences, while in July 2012 it released the comments and suggestions received by it. However, it wanted the government to amend the banking laws before starting the process towards issuance of new banking licences.

Among the major groups interested in seeking new banking licenses, Religare Enterprises’ chief Shachindra Nath said, “It is important that new banks are brought in to contribute towards the overall financial inclusion and development agenda.”

Nath said Religare was waiting for RBI to come out with its final guidelines post which it would evaluate how to align its banking business model with the regulatory intent. Another banking aspirant L&T Finance’s President and Wholetime Director N Sivaraman as also said that his company has a vision of being a comprehensive financial services provider and the banking license has a potential to enable it provide all products and services.“Currently we are a lender with some other services, but with deposits and other banking services, we shall get to interact with all customers on all grounds and would wait for the final guidelines of RBI,” Sivaraman said.

Reliance group is another entity to have shown its interest in starting new banks ever since a proposal was floated about two years ago to issue new licences. Addressing the shareholders of the group’s financial services arm Reliance Capital in 2011, Anil Ambani had went on to say that the group’s banking entity could be called ‘Reliance Bank’ depending on the regulatory framework.

Reliance Capital CEO Sam Ghosh also recently said the group is full-prepared from its side for banking foray and it has been working on this for quite some time.

PTI