Banking licence should be given discreetly: RBI

India needs to plug gaps in existing banking rules before it lets corporate houses open banks, the Reserve Bank chief said on Tuesday, signalling the need for tighter regulation to deter firms from practices like self-lending.

Duvvuri Subbarao's comments come amid expectations that the Reserve Bank of India will soon announce initial draft guidelines for the issue of new bank licenses, a move keenly awaited by a host of Indian corporates eyeing the banking space.

"As much as these prescriptions are extensive, there are still gaps," Subbarao told a banking conference, noting that if a corporate had an interest in a bank as a promoter or shareholder but had no board position, current rules did not prevent the bank from lending to the corporate.

"As we contemplate allowing corporates to promote banks, there is need for changes in statutes and regulations to address these concerns," Subbarao said.

Corporate houses such as the Tatas, the Anil Dhirubhai Ambani Group, the Bajajs and the Mahindras who are in the financial services space through non-banking financing companies, may look at the banking space as it opens up avenues to mop up low-cost deposits and raise large amounts of funds.

The government brought a bill to parliament in March to amend the banking laws to give the RBI more teeth.

The measures include giving the RBI powers to set conditions while approving the acquisition of share capital and also to call for information and returns from associate companies of banking companies engaged in financial services.

"We have sent a draft amendment to the Banking Regulations Act to the government and the government is working on it. So amendments to the Banking Regulations Act are necessary before we contemplate corporates coming into banks," Subbarao later told reporters.

The RBI had last issued licenses a decade back and has said it will only issue a few new licenses.

The RBI issued an initial discussion paper last year on new bank licenses and subsequently sought feedback. But the issue has since been delayed as the Finance Ministry and RBI reportedly had differences on issues such as the scale of foreign ownership permitted in new banks.

There are persuasive arguments both for and against the issue of new licenses, Subbarao said.

The strongest point in favour is that corporates can bring in capital as well as business experience and managerial competence, he said.

But it was hard for regulators to prevent or detect "self-dealing" because banks can hide related party lending behind complex company structures or by lending to suppliers of the promoters and their group companies, he said.

Source: Business Standard