More new banks will drive fresh competition: RBI

Right size still remains a debate

More new banks will drive fresh competition: RBI

Inaugurating Ficci’s Corporate Finance Conference here, Gokarn said, “Competition [in the banking system] also has many benefits. As we are moving further down the [financial] inclusion agenda, which is to try and get banking services at a very basic level, perhaps new banks are one way of achieving that.” However, he said the “right size” of a new bank remains a debate for the industry.

RBI had released a discussion paper in August last year on issuing a limited number of new bank licences, while the feedback it received from various industry stakeholders in December didn’t get any consensus on any of the issues addressed in the paper. In this context, Gokarn dwelt in the speech saying there wasn’t any consensus on the right size of a bank as there were several variables involved.

“There is benefit from scale economies and the ability of banks to deliver services more efficiently as they grow in size,” he said. At the same time, it was emphasised that large banks aren’t necessarily safe banks as can be seen from the recent global financial crisis, he said, adding, “The larger they get, the more of a risk they pose to the system as a whole.”

In their feedback to the discussion paper, industry bodies asked RBI to cap the minimum initial capital requirement to start a bank at Rs 10 billion ($222.2 million), which could be raised over time to Rs 15-20 billion. But non-bank finance companies and microfinance institutions preferred a lower start-up capital of Rs 3-5 billion.

Further, the RBI Deputy Governor said banks should avoid greater exposure to infrastructure and that a greater fiscal consolidation by the government was needed to meet funding needs of the industry. “If banks rely predominantly on short-term funds, their increasing exposure to long-term assets is not necessarily a good thing from an asset-liability viewpoint,” he said.

Gokarn also said policies have to be tuned to generate more foreign money in infrastructure.

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