India Inc in banking: Watchdog warning

New Delhi: India Inc's entry into the banking business is creating problems for the authorities who are looking to guard against those entities which may seek to manipulate the business.

The government is considering adding more teeth to Reserve Bank of India to deal with banking sector problems before permitting private sector entities to float commercial banks.

Empowering RBI is essential for obtaining information about other businesses of the corporate houses seeking banking licences, in order to protect depositors' interests, official sources said.

The government, sources said, is considering to amend the Banking Regulation Act through which RBI would be empowered to seek information from an entity running bank and other businesses like insurance and asset management as well.

Sources said this is relevant as the risks of these companies can slip into banks by virtue of same parentage, sources said.

Banking Regulation Amendment Bill is likely to be tabled in the Monsoon session of Parliament.

Presently, insurance companies are regulated by Insurance Regulatory and Development Authority and asset management business comes under the purview of SEBI.

After the clearance of the bill, RBI would have power to call for information and assess information, sources said, adding, these powers are required if the private entities are allowed to enter into banking space to protect interest of depositors.

As per the current practice, India follows subsidiary model where non-banking business of a bank like insurance and asset management are subsidiaries. By virtue of this, risks attached with this can impact the banking entity.

Meanwhile, RBI has already said it will look at business plan for financial inclusion, in addition to other things, before granting banking licence to new companies.

"One of the criteria for evaluating application (for new bank licence) that we will get in due course of time, will indeed be their business plan for financial inclusion," RBI Governor D Subbarao had said earlier this month.

The apex bank had brought out a discussion paper in August, 2010, on giving out new banking licenses to business houses and non-banking finance companies, besides regulations for the same to foster competition.

The RBI also sought to know "whether industrial and business houses could be allowed to promote banks."

Various entities like Reliance Capital, IndiaBulls, Religare, IFCI and Aditya Birla Financial Services are said to be mulling entry in the banking space.

India presently has 27 public sector banks, seven new private sector banks, 15 old private sector banks, 31 foreign banks, 86 regional rural banks, 4 local area banks, 1,721 urban cooperative banks, 31 state cooperative banks and 371 district central cooperative banks.

Source: Financial Express