New bank licences must await changes in banking laws
Nov 18 2012, 2216
If a statutory financial regulator is expected to initiate a critical process of allowing new entrants in its regulatory domain without the necessary legal backing from by the country’s parliament, then such an expectation may be unreasonable and impatient. This is what seems to be happening on the critical issue of licensing new banks. The central bank is almost ready with its final guidelines for new bank licences, but needs its regulatory powers to be strengthened to deal with large and small corporate groups, which would be allowed under its proposed guidelines. But to make that happen, RBI, in its wisdom, believes that vital amendments are needed to the Banking Regulation Act (1949) before the final guidelines are issued and applications invited for setting up new banks. For over a year now, RBI has made clear this stance as well as the details of the vital amendments it seeks. These amendments to Banking Regulation Act are among the various clauses of the Banking Laws (Amendment) Bill, 2011, still under consideration by the two houses of parliament and yet to be approved through a vote. In RBI’s own words, these amendments include the removal of restriction on voting rights and concurrently empowering RBI to approve acquisition of shares or voting rights of 5 per cent or more in a bank to persons who are ‘fit and proper’; empowering RBI to supersede the board of directors of a bank so as to protect depositors’ interest; and facilitating consolidated supervision. However, in recent weeks, the finance minister has advised RBI not to wait for parliamentary clearance, since the vital sought-after amendments are already present in other existing laws and RBI’s own norms, either directly or indirectly. He feels that the BL(A) Bill will only formalise these further and emphatically. The RBI governor, on the other hand, stated in a post-policy conference call for media on October 30, that legislative amendments will give RBI the necessary authority, power and dispensation to deal with companies entering the banking sector. When asked whether the three amendments he wanted for RBI’s empowerment applied only to corporate applicants and not non-banking financial companies wanting to convert into banks, the governor was rather firm in stating that RBI’s position was that it was best to open up the process for all potential applicants at the same time. Ten new private-sector banks were allowed under RBI’s 1993 revised guidelines and only two under its 2001 revised guidelines. Clearly, there is case for competition in the banking sector with the entry of new banks. This is particularly so in the interest of depositors in the banking system. Take the case of savings account interest rate. The only banks offering 2-3 per cent more than the industry-prevalent 4 per cent are the two that came in after the 2001 guidelines. It is, therefore, nobody’s case that the process should get delayed. However, without parliamentary clearance, RBI may be vulnerable to legal suits and challenges from rejected new applicants who really pose a risk to a fragile banking system. In that case, it may be premature to pressurise RBI, and instead convince parliament of the necessary changes to get the bill passed early. Should that go through, it may not be unfair to put pressure on RBI to speed up the process of granting new bank licences.