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The paper also seeks views on whether large business groups with diversified ownership should be given bank licences. It also hints at RBI’s hesitation in giving banking licences to entities engaged in real estate activities given the sensitivity of the sector.
Three different scenarios, with their pros and cons, have been pictured for the minimum capital requirement of new banks. The first scenario argues for a capital base above Rs 300 crore; the second is for Rs 1,000 crore. The third option is to have an initial minimum capital of Rs 500 crore to be increased to Rs 1,000 crore in five years.
Current RBI guidelines put the minimum capital requirement of private banks at Rs 300 crore.
On whether industrial houses should be allowed to acquire bank licences, the paper says, “The structure proposed… should be such that the (new) bank can be ring-fenced from other financial and commercial entities in the group. RBI should be satisfied about its ability to supervise the bank and obtain all required information from the group relevant for this purpose smoothly and promptly.”
It has raised the issue of whether industrial and business houses that have predominant presence and experience in the financial sector could be allowed to set up banks subject to other due diligence processes or, alternatively, as an intermediate step, allowed to take over regional rural banks, before considering giving permission to them to set up banks.
Comments have been sought on whether the promoter holding in new banks should be capped at 40 per cent.
On foreign direct investment, the paper says, “Since the objective is to create strong domestic banking entities and a diversified banking sector which includes public sector banks, domestically owned private banks and foreign owned banks, the aggregate non-resident investment, including foreign direct investment (FDI) and that from NRIs and foreign institutional investors, could be capped at a suitable level below 50 per cent and locked at that level for the initial 10 years.”
Foreign investors willing to invest in banking or promote banks in India will be constrained since raising of additional capital predominantly from domestic sources may pose a problem, the paper says. This is in contrast to the present FDI policy which allows 74 per cent foreign equity in private sector banks. Banks may be able to use innovative approaches brought in by foreign promoters.
The discussion paper, tiled “Entry of new banks in the private sector”, is a follow-up regulatory action after finance minister Pranab Mukherjee announced in his budget speech that RBI would consider issue of new bank licences to meet the growing financial needs of a fast-expanding economy.
Deepak Parekh, non-executive chairman of HDFC, said, “ RBI did not have a pleasant experience in the past handing out licences to professionals to run banks, so it is now toying with the idea of industrial houses which have a good marketing experience in the rural areas. There are no inherent risks in giving licences to industrial houses and RBI will put the necessary safeguards in place. Capping foreign holding below 50 per cent will not create confusion over ownership issues.”
RBI has pointed out that many of the banks set up by individuals and professionals for which licences were issued in the past 17 years have either failed or merged with other banks or have had muted growth. The last private sector bank to start commercial operation was Yes Bank in 2006.
The discussion paper has invited comments and suggestions from banks, non-banking finance companies, industrial houses and the public at large by September 30. Currently India has 27 public sector banks, seven new private sector banks, 15 old private sector banks, 31 foreign banks, 86 regional rural banks, four local area banks, 1,721 urban cooperative banks, 31 state cooperative banks and 371 district central cooperative banks.
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