Treading The Path of Expansion

Sat, Oct 1, 2011

Biz Arena

After prolonged deliberation, Reserve Bank of India released guidelines for the players seeking entry in the banking world. While for some it might prove to be a tryst with destiny, others are bound to get a setback. Banking has long been envisaged as a ladder to climb the tree of success for the fruits of money and power it bears. YES Bank was the last bank to get license according to Jan 2001 draft guidelines and since then RBI has been consistently monitoring the overall implications of the guidelines so as to contemplate best possible amendments for the same.

Indian economy is growing rapidly, a fact which is quite evident and the almost no impact of global economic meltdown is testimony to its robustness. This gives much scope for Indian Banking sector to meet the growing needs of people, especially in rural sector, majority of which still lacks access to the banking operations. Hence, to increase the overall geographic coverage, as well as keeping in mind interests of people as a whole, RBI has decided to allow some more private players and Non banking Finance Companies to play the game following the rules and guidelines of RBI and meeting the required eligibility criteria. It shall implement some amendments in the Banking Regulation Act based on extensive feedback from previous licensing policy, banks and public at large. The final draft guidelines would be finalized after October31, 2011.

The eligibility criteria itself gives a picture of who all could be expected in the bandwagon. The guidelines allow only private sector entities and groups controlled by residents with a sound expertise of more than 10 years to come forward. Banking requires adequate experience in broad financial sector, overall competence and trustworthy people who can withstand the rigor managing a bank. Also, past experiences of RBI shows that banks with inadequate experience failed to survive and had to be either merged or shut down.

Real Estate firms or firms with more than 10 percent of their income from activities like broking and trading are also not eligible to apply. This is another effort in the direction to avoid making banking a part of owner’s interests.

A few implications of the draft are discussed below:

  • Protecting Depositor’s Interests: In order to protect public interests, the draft legislation gives powers to RBI to supersede Board of Directors of a banking company. This will ensure that along with the bank, depositor’s interests too are taken care of. Further, it plans to give voting rights to investors having sufficient shares or to more suitable people in the bank. But at the same time it could be a matter of concern for foreign players and joint holders who might like to limit powers to them and might be having some other plans, rolling them out under constant supervision may not be possible.

Also, whether RBI would be able to maintain such level of supervision is another question left to be answered.

  • Minimum Capital Requirement: The rise of minimum capital requirement from 200 Cr. to 500 Cr. will ensure that banks operate on a strong capital base. Further, sufficient resources would be there for financial inclusion (a term restricted not only to opening bank accounts but also providing other facilities like credit, remittance for poor etc.). Hence, it would only call interests of serious entities having sufficient financial backing along with willingness to focus on financial inclusion.
  • Covering Rural Sector: Since new banks will have to open at least 25 branches in rural sector and because of this, chances of people becoming more adept with banking services are very high. People in villages are still following age old traditions for keeping their money and are still afraid of terms like investment, interest and lockers. Having banks nearby will give them an opportunity to become a part of developing India and hence will help Government bring closer to its target of bringing the poor at par with the better half of the nation.

However it is difficult to say whether a bank will be able to hire suitable expertise to work in rural location. Also, it’s not easy to maintain same reputation of bank in a village and a city.

  • Converting Non-Banking Financial Companies (NBFC) into Banks: Since NBFC‘s are regulated by RBI and have a good track record and are already regulated by RBI, it would be easier to address its concerns. Also, it has been successful in expanding the reach of financial systems and hence by converting them into banks, the objective of financial inclusion can be better achieved.

However, the track record of NBFC cannot be taken as a sole criterion for converting them into banks. Initial capital requirement, different models and ability to run the bank under heavy restrictions might turn out to be a disappointing factor.

  • Foreign Shareholding in the new banks: A limit of 49 percent foreign shareholding will enable foreign capital to be utilized for domestic purpose and hence a foreign collaboration in setting up domestic banks. But willingness of foreign entities to promote banks in India could be a issue.
  • Entry of corporates: While the entry of corporates have not been totally banned but the draft seems to be biased and less keen in giving corporate sector a chance in banking industry. Government feels that banking is not always about making money and moving ahead but looks at a broader perspective of understanding the overall interests of people and country as a whole.

The brief guidelines give us a broad idea of what RBI expects from the banks seeking license to operate. However the picture will become more transparent as the final set of guidelines follow in. Since the timeline for granting licenses too shall be increased, much is left for anticipation. However, one thing is surely crystal clear, it will make sure not to repeat its previous mistakes and that the amendments are thoroughly incorporated.


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