Finance minister P Chidambaram wants India’s banking regulator to speed up the process of giving licences to a new set of private banks — a process started by his predecessor in February 2010 when Pranab Mukherjee, then finance minister, announced in his Budget speech that the Reserve Bank of India (RBI) would soon allow a new set of banks to come up. Since then the RBI first issued a discussion paper and followed it up by releasing the draft licensing norms for the new banks. It is yet to finalise the licensing norms as the regulator feels that it doesn’t have sufficient power to supervise smart industrial houses if they are allowed to set up banks. It wants the power to supersede the board of a bank if it doesn’t follow the norms. This can be done by amending the Banking Regulation Act of 1949; and this has been awaiting Parliament nod.
While RBI refuses to move an inch on this till the Act is amended, the finance minister is pushing the regulator hard as he feels the licensing norms can empower the RBI to supersede a bank board. Besides, any trigger for supersession of a bank board can only come after a few years, and not immediately after allowing a corporate house to set up a bank. By that time, the Act will definitely be amended. The RBI is aware of this and yet it’s not moving ahead, exemplifying the lack of trust between the two.
In January 1993, the RBI had issued the final guidelines on the entry of the first set of new private banks. For over two decades, since the nationalisation of 14 large banks in 1969, followed by another seven in 1980, no private bank had been allowed to set up shop. During this period, public sector banks had expanded their networks extensively, adding numerous branches, and catering to the socioeconomic needs of the masses in a highly regulated industry where the central bank dictated interest rates and directed credit flow.
Within two decades of nationalisation, government-owned banks accounted for 91 per cent of the bank branches in the country and 85 per cent of the total business done by the sector. The rest was shared by a handful of foreign banks and old private banks. “A stage has now been reached when new private sector banks may be allowed to be set up,” the RBI said in its historic declaration in 1993. The objective was to introduce competition in the sector and force banks to be efficient and more productive.
The RBI guidelines made it clear that allowing the entry of private banks was a part of the financial sector reforms to provide competitive, efficient and low-cost financial intermediation through the use of technology. The new banks were to have a capital of at least Rs 100 crore and their shares had to be listed on the stock exchanges.
Around the same time, India had introduced new asset classification norms as part of its prudential regulations. Banks could no longer get away with accumulating bad loans — which were piling up as a result of poor credit appraisals and monitoring as well as political pressure to favour certain industrial groups. Banks now had to set aside money to make up for any such souring assets.
Simultaneously, Parliament amended the Banking Regulation Act of 1949 to lower the government’s absolute ownership in state-run lenders to 51 per cent, despite resistance from the powerful trade unions that controlled the industry in those days.
Subsequently, in 2003, two more new private banks were given licence -- Kotak Mahindra Bank and Yes Bank. The promoters had to bring in higher capital, Rs 300 crore each. This time too the objective was to intensify competition.
Almost a decade since then, the competition has indeed intensified among banks but only on the urban turf and still at least 40 per cent of the nation’s adult population does not have access to banking services. Which is why India needs more banks. The RBI should not delay the process any more. It should go ahead and allow the “fit and proper” individuals, institutions and even industrial houses to set up banks.
From the first set, three banks floated by financial institutions — HDFC Bank, ICICI Bank and Axis Bank (UTI Bank renamed) — have done well. The fourth one, IDBI Bank, with which its promoter project finance company IDBI merged, hasn’t done anything remarkable. IndusInd Bank was a laggard till a new management put it on a growth path. Among the rest, Ramesh Gelli’s Global Trust Bank crumbled under bad assets after getting too bold in stock market play and was forced to merge with public sector Oriental Bank of Commerce. Bank of Punjab couldn’t get its act together and offered to merge with Centurion Bank. And Centurion Bank, renamed Centurion Bank of Punjab, after that deal, merged with HDFC Bank. The experience of the first set of banks should come in handy while choosing the promoters of new banks.
(The author is an editor at Mint)