Cautious move

The draft guidelines released by the Reserve Bank of India (RBI) on new bank licences for the private sector are much tougher than earlier norms. Though the banking sector should expand further and there is room for expansion, there is the need for caution because it is an area which had once seen a lot of malpractices.

The nationalisation of banks in 1969 and 1979 had freed major banks from the control of large industrial houses. It also made banking more socially and economically relevant.  Public sector banks account for three-fourths of the banking sector now. However big they have grown, they are unable to meet the entire the banking needs of the country and hence the need for more private banks.

The new guidelines have not closed the field for industrial houses, except those engaged substantially in real estate, construction and capital market activities.  Industrial houses had once diverted funds from the banks they had controlled and the new norms will ensure that they cannot do this again even if they secure new banking licences.

The RBI has sought to lay down a whole array of conditions like a diversified ownership, sound credentials and a 10-year banking experience and integrity to qualify for licences. The insistence of Rs 500 crore of minimum capital requirement and a capital adequacy ratio of 12 per cent will see to it that only those with sufficient financial strength will seek to enter the field. Since expansion of banking is a major aim they are also required to open one-fourth of their branches in rural and semi-rural areas. The RBI will have the power to supersede the bank’s director board in some cases.

Though many of the norms may seem draconian they are needed because banks have access to thousands of crores of  public and customers’ funds. RBI governor D Subbarao had recently cautioned against corporations trying to use banks “as a private pool of readily available funds.”

Even with stringent conditions there is great demand for new banking licences. That shows the potential for growth of the sector in the coming years. The RBI will be very selective and discriminating in awarding the licences. It has even said that meeting the eligibility criteria does not ensure that an applicant will secure a licence. The conditions should not be relaxed but only tightened if necessary.