Fair treatment of customers must be leitmotif of new private sector banks
Feb 24 2013, 2008
India’s banking sector is heading for a new era. The much-awaited final guidelines on licensing for new banks, released by the Reserve Bank of India on Friday, have set the stage for the revolution. Nearly nine years after the last private sector bank was set up, India is going to see a bunch of new generation banks hopefully ushering in a new banking culture with focus on financial inclusion and technology. The central bank has laid down stringent rules with respect to promoter eligibility, corporate structure, foreign shareholding, corporate governance, prudential and exposure norms. The decision to allow new banks under wholly-owned non-operative financial holding companies (NOHFCs) with a minimum paid-up capital of Rs 500 crore have made several companies and promoters, who are ready to take a plunge, ecstatic. The RBI has rightly kept out of the license purview a number of companies in speculative business such as brokerage, real estate, and commodities like gold or gold finance from starting a bank. The central bank has stated that business model and business culture of the applicants should not be misaligned with the banking model and their business should not potentially put the bank and the banking system at risk on account of group activities such as those that are speculative in nature or subject to high asset price volatility. It has also clarified that feedback on applicants would be sought from other regulators, and enforcement and investigative agencies such as the income-tax department, CBI and enforcement directorate, among others. While the minimum capital is kept at Rs 500 crore, 40 per cent of the paid-up capital will be held by the holding company (NOFHC) for a locked-in period of five years. If further equity capital is raised within five years, NOFHC should continue to hold 40 per cent. It should reduce the holding to 20 per cent within 10 years and to 15 per cent within 12 years. New banks will need to maintain minimum capital adequacy ratio of 13 per cent for at least three years, subject to upward revision by RBI. Banks will have to be publicly listed within three years. The new rules have come at a time when Indian banks are facing a plethora of challenges. Asset quality of banks has come under increasing pressure with rising bad debts and restructured loans. Gross non-performing asset (NPA) ratio for the banking system, which was 2.4 per cent in March 2011, increased to 3.6 per cent by September 2012. Going forward, the banking system will continue to face a challenging environment given that its fortunes are closely linked with those of the economy. Improving bottomlines and preserving interest margins (NIMs) are primary motives for bank management, while making banking services accessible and the transactions affordable, has unfortunately reduced to being a regulatory agenda. This needs to be kept in check. RBI needs to keep a watch on all new companies foraying into banking sector if they continue to focus on their customers and not their shareholders and employees. They should ensure fair treatment for customers. As millions of Indians still remain unbanked, financial inclusion continues to be the most important challenge for the sector. New banks have been told to have 25 per cent of their branches in unbanked rural areas with a population of less than 9,999 as per the latest census. The dream of financial inclusion cannot be realised unless the rural poor are made financially literate to handle a bank account, and the banking transaction costs are brought down substantially. Let’s hope that new banks would herald a positive change for the country and the economy as a whole.