RBI gets wide ranging comments on new bank licences

Reserve Bank of India (RBI) released the gist of the comments on the Discussion Paper on "Entry of New Banks in the Private Sector". The range of comments received has been very wide and does not indicate consensus on any of the issues, the central bank said. The comments received are reflective of sectoral positions, i.e. of banks, NBFCs and industrial houses. Comments from others also spanned a wide range, the RBI said. Incumbent banks are opposed to the idea of allowing industrial/business houses to promote new banks, as the large capital buffer that would be available to them would create an uneven playing field. Moreover, having financial licence and having industrial activity implies there could be connected lending. Allowing industrial houses to own banks will also exacerbate the concentration of economic power and political influence, argued some stakeholders. However, as an experiment, a couple of industrial houses could be allowed to own restricted small banks.



Those who favour giving licence to industrial/business houses say that financial inclusion requires higher scale of operations that the business houses would be able to achieve by deploying large capital. Furthermore, these entities have the entrepreneurial and managerial talent that could be gainfully harnessed in the banking sector. On the eligibility criteria for granting licence to industrial/business houses, the suggestion is that only entities with diversified and transparent shareholding structure should be permitted to set up banks. On the issue of minimum capital requirement, the federations/ associations of industry/ banks favoured a high start-up capital of Rs 10bn, which could be raised up to Rs 15-20bn over a period of time, so that they can make investments in technology for financial inclusion and scale up operations.On the issue of promoters' shareholding in new banks, while the federations/ associations of industry suggested a range of 40-51%, the NBFC/MFI sector suggested a lower range of 30-40%. The minimum promoters' contribution to be retained after dilution of stake over a period of 5-10 years ranged from 5-26%. On permitting conversion of NBFC into banks or promoting new banks, existing banks were in favour of allowing only standalone NBFCs to promote banks and at the same time debarring NBFCs sponsored by industrial/business houses. Most respondents felt foreign shareholding should be capped at the current level of 74%. Some favoured the removal of all restrictions, while a few suggested that the apex bank should put a cap of 50%.