New Banking License Policy Questionable

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Corporate houses can now apply for banking license. Licensing for them, as new private banks, was under process for last six months. Finance Minister, Shri Pranab Mukherjee had earlier said that rules of banking license would be amended.

Shri Mukherjee had announced in his budget speech concerning rules of Banking license would be cleared at the end of the current financial year i.e. 2011-12. At last, the Reserve Bank of India (RBI) was issued draft guidelines relating to the banking licenses on 29th August, 2011. The business houses have been backing banking licenses for the last several years.

As per guidelines, running financial companies can be transformed into a bank. New banks may also be opened independently. But promoter of proposed banks must have an impeccable track record. He should have 10 years working experience in the financial sector. The most important condition for the proposed Banks is paid-up capital of Rs.500 crores. This will be essential for opening a bank. These banks will have to open 25 percent of their branches in rural or backward areas.

Corporates wishing to open banks has prohibited to lend money from other banks for further investment in banks. Foreign investors can't invest in these banks more than forty nine percent. If any promoter has more than 20 percent stake in new private banks, he or she will have to reduce his or her share up to 20 percent within 10 years. The RBI has made regulations for new private bank’s promoters to keep their share up to certain limit i.e. 20 percent. So that corporate houses couldn’t restore the legacy on such banks. These banks will have a listing in the stock market within two years. Its ownership may be with a separate holding company.

In the light of giving license to banks, the RBI is making its mind to bring reforms in existing guidelines for Non-Banking Financial Companies (NBFCs) as well. The RBI may change the directives for the loan distribution, adequate provisioning for risk and associated statute for capital. In this regard, the capital adequacy ratio of NBFCs may be raised to 12 per cent. The RBI intended to hold NBFCs equivalent to commercial Banks through these stringent measures. At the moment, corporates are making big chunk of profit on accounts of favorable terms and conditions. Reserve Bank's anticipated move may increase the quality of functioning of NBFCs. Risks related to the NPA will also reduce up to great extent.  It may also plug the other loopholes which are at this time persisting in NBFCs.

Currently, many business houses are interested in winning license for New Banks. Tatas, AV Birla Group, Bajaj, L&T, LIC Housing, Shriram Group, Reliance, PFC, IFCI, India Inc, and Religare, etc., are vital names in this respect. Although the RBI has issued required instructions to open New Private Banks, yet, it is difficult to issue license to every applicant. In this case, the RBI may take decision on case to case basis.

The RBI wants to keep its effective control over New Banks. It has therefore made a provision under which it would be overriding position over New Bank’s Board. The RBI will keep on close watch over desiring investors who longing to invest more than 5 percent in Banks. RBI is assuming that by its terms and conditions it will keep hold of control over these Banks. It is also believed to be suspicious of the activity of the New Banks; the board of said Banks will come apart by RBI without difficulty. In case of ineligible investors, it may furthermore stop them for investment.

Here, it is necessary to clear that there is big gap between RBI opinion and veracity. In the Fiscal year 2003-04, a Private Bank named "Kotak Mehindra” came into existence. Its key promoter is Mr. Uday Kotak. The other significant Private Sector Bank is Yes Bank. Both Banks are in net profit since its inception. However, their social responsibility is still negligible. Other private and foreign banks have the same circumstances and direction. Their presence or their activities in rural areas are limited and are also detached from social obligations. They are too indifferent towards government’s sponsored schemes.

Proposed New Private Banks will open 25 percent branches in rural or remote areas or will meet their social obligations are entirely dubious. Today, private and foreign banks are levying higher rate of interest, excessive processing fees and other hidden charges. These banks also don’t mind in seeking the help of gangsters and hooligans in recovering the overdue Amount.

In village and even in cities private or foreign banks are not hesitating to ignore and infringe convention of RBI. In the event of default by farmers and ignorant people, such financiers take the help of anti-social elements. Police also do nothing in whole affairs. Such people are just compelled to tolerate atrocities of these banks quietly.

The corporate’s motto is self explicit. Their concern is always for making profit. Despite this, the government is giving full support to them in the name of development. Obviously, the present state of affairs doesn’t support the RBI’s objective. In this way, concept of financial inclusion & social commitment may never turn into actuality.


Mr. Satish Singh is a State Bank of India, Delhi, employee and a freelance writer. He has a diploma in journalism from the Indian Institute of Mass Communication, New Delhi.

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