<p>At a time when the fiscal deficit, which is as much a function of high public borrowing as it is of expenditure and currency mismanagament, looks untamable, the government has pushed the case for issuing private banking licences to corporates and public sector entities. <br /><br /></p>.<p>An applicant for a banking licence would need just 10 years of experience to operate in this economically crucial sector. Ahead of this week’s Union Budget, this is an attempt to play to investor emotions without, at this point of time, having much hope of coming within sniffing distance of the 5.5 per cent growth rate which the finance ministry has been touting for the fiscal year ending March. It is also an indication that the government, which dismissed the Central Statistical Organisation’s 5 per cent growth projections by replacing it with its own estimates of growth, is still relying on quick-fixes like lending rate cuts, open sky policies for aviation and banking to restart the growth spiral.<br /><br />While initiating a more liberal bank licensing regime, the government has shown little indications of bringing in tighter prudential norms. RBI guidelines for private banking licences state that promoters and promoter groups should not follow business models which are not in alignment with prevailing banking models, while speculative investments have been indulged in by banks in the past without due safeguards for depositor funds or investor interest. RBI has taken baby steps towards a stricter regime on credit restructuring, following many PSU and private banks playing favourites when restructuring loans of businessmen who use their political influence to buck the system. Yet, it is a point for debate whether new banks will address such cronyism which puts the interests of their depositors and shareholders at risk.<br /><br />New banks will not ramp up significantly with new branches, unless they have enough customers to justify it. Contrariwise, getting customers to switch banks will be a problem without enough branches. Besides, any rules on capitalisation of new banks will always give an advantage to the larger, established institutions that operate on years of data on bad loans. Taking India back to a growth trajectory needs fiscal policy tightening through astute debt management and structural reforms to boost exports. The banking system has been merely a router of subsidies and incentives in the government's export promotion scheme. It can evidently be made to do more without being bloated up further.</p>
<p>At a time when the fiscal deficit, which is as much a function of high public borrowing as it is of expenditure and currency mismanagament, looks untamable, the government has pushed the case for issuing private banking licences to corporates and public sector entities. <br /><br /></p>.<p>An applicant for a banking licence would need just 10 years of experience to operate in this economically crucial sector. Ahead of this week’s Union Budget, this is an attempt to play to investor emotions without, at this point of time, having much hope of coming within sniffing distance of the 5.5 per cent growth rate which the finance ministry has been touting for the fiscal year ending March. It is also an indication that the government, which dismissed the Central Statistical Organisation’s 5 per cent growth projections by replacing it with its own estimates of growth, is still relying on quick-fixes like lending rate cuts, open sky policies for aviation and banking to restart the growth spiral.<br /><br />While initiating a more liberal bank licensing regime, the government has shown little indications of bringing in tighter prudential norms. RBI guidelines for private banking licences state that promoters and promoter groups should not follow business models which are not in alignment with prevailing banking models, while speculative investments have been indulged in by banks in the past without due safeguards for depositor funds or investor interest. RBI has taken baby steps towards a stricter regime on credit restructuring, following many PSU and private banks playing favourites when restructuring loans of businessmen who use their political influence to buck the system. Yet, it is a point for debate whether new banks will address such cronyism which puts the interests of their depositors and shareholders at risk.<br /><br />New banks will not ramp up significantly with new branches, unless they have enough customers to justify it. Contrariwise, getting customers to switch banks will be a problem without enough branches. Besides, any rules on capitalisation of new banks will always give an advantage to the larger, established institutions that operate on years of data on bad loans. Taking India back to a growth trajectory needs fiscal policy tightening through astute debt management and structural reforms to boost exports. The banking system has been merely a router of subsidies and incentives in the government's export promotion scheme. It can evidently be made to do more without being bloated up further.</p>
