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Monday, October 29, 2012

RBI must not dither over issuing new bank licences

In the history of Indian banking, possibly no other developments have had as much fundamental and revolutionary impact as the overnight nationalisation of banks in 1969. And, then, some 25 years later, pursuant to the Narasimham Committee recommendations, the RBI giving out licences to set up new commercial banks in the private sector.

At their respective times, both these momentous steps, had phenomenal positive impact and rewrote the rules of the game for Indian banking. The structure and the system that we have today is, unarguably, the result of these two developments.

Even as the so-called new-generation private sector banks grew at a fast pace, eating into the market shares of the older public sector and private banks, it is critical to understand that they also created new products/services, new mix of revenues-costs-profits and, thereby, made the entire banking system reorient basic business models.

For more than three years now, interested parties have been voicing both for and against starting the next phase, that is, of allowing the entry of more private banks.

The then Finance Minister, Pranab Mukherjee, in his 2010 Budget speech, announced that business houses and NBFCs (non-banking finance companies) would be allowed to set up banks. This generated a lot of interest. Since then, there have been many strong voices on this subject.

The RBI itself has discussed this, notable being its view that licences would be given only after the Banking Laws Amendment Bill is passed by Parliament.

More banks needed?

In one sense, this question is irrelevant, as the number of players will, just as in any other industry, from time to time be determined by the marketplace through forces of competition. It will be foolish to assume that the RBI has any interest in appropriating this role to itself.

In another sense, it is also a settled question from the RBI’s point of view itself, as the central bank has had a long consultative deliberation process with the draft guidelines for licensing released more than a year back, in August 2011. And back in August 2010 there was a ‘discussion paper’. Recently, the RBI also put out comments on the draft guidelines. To put it simply, it has been a very long and boring stretch of ‘groundwork’.

Hesitating to move ahead?

Last year, at Bancon-2011, C .Rangarajan, Chairman, PMEAC, while pitching for moving ahead with allowing entry of more banks, said: “A closed system can only become oligopolistic. The ‘threat’ of entry should not be eliminated.” And knowing Rangarajan, it would be ridiculous to construe this as merely the “Government’s view”. While the RBI’s cautious approach is just perfect and laudable, its continuing discomfort to move at all is somewhat perplexing.

The more contentious issues such as allowing industrial houses to set up banks and protective mechanisms for that have all been thrashed out.

Eligibility norms, requirement for non-operative, non-leveraged holding company structure, floor and caps for promoter holding pre- and post-public listing — are all conceptually well-defined and widely understood.

In any case, it is not going to be some kind of ‘automatic’ licensing. Possibly, a committee to be set up will go through the licence applications and subject them to a very tough evaluation. And the RBI will any way ultimately release a certain number of licences.

For those who are familiar with the licensing history of the 1990s, the application for a bank with a focus on a particular State, with four different parties jointly promoting the bank, and the fact that the proposal finally did not find approval is proof enough that the RBI’s evaluation process would be systematic, fair and sound.

Ideal licensees

There is another important angle that must be considered here. While allowing only the most deserving applicants is important, India’s own experience in the last two decades clearly has proved the fallacy of there being some kind of perfect promoters and RBI finding them ab initio at licensing stage.

Business environmental changes and revised strategic priorities of the promoters can also result in a need for market-driven or regulator-assisted restructuring exercises.

Public memory is ultra-short but it is valuable and illuminating to refresh our memories of Times Bank and its eventual merger with HDFC Bank; Global Trust Bank and its rescue by merger with the public sector Oriental Bank of Commerce; Centurion Bank along with Bank of Punjab being now inside of HDFC Bank; Ashok Leyland Finance being part of IndusInd, and so on.

The RBI, in each of the aforementioned and other situations, has undoubtedly done a commendable job as the regulator. The point here is, it is this experience that should make the RBI go ahead with allowing some more players into the system.

While it is difficult and futile to speculate as to who will get to set up banks if and when allowed, there are, without doubt, a large number of interested and good applicants. Apart from the top business houses, reports suggest that NBFCs such as L&T Finance Holdings, Religare and Indiabulls would possibly apply. An interesting possibility is that of India Post applying for setting up Post Bank of India.

Time to go ahead

At times, one cannot but help feel that everyone else — the Government, the experts, the industry, the business community — seems to have a lot more confidence in the RBI than what the apex bank has in itself.

Else, there is no solid explanation for the hesitant approach in this area . The RBI should immediately announce the window for applying for licences, also specifying the date for awarding the first batch of licences.

Just as one never liked the SBI to be allowed to become too big, one wouldn’t want an ICICI, HDFC or for that matter any other bank to be too big either.

Let there be more competition. Let the next phase of banking revolution begin. The RBI must act. Not with just guidelines but with dates and deadlines.

(The author is a management consultant. The views are personal.)


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