RBI's Draft Guidelines on New Banking Licences

The Reserve Bank of India wants amendments in the Banking Regulation Act before a decision on the issue of the new policy on grant of licenses to banks. The draft guidelines for new banking licences are expected to come shortly, but amendments to the Act would take time.

There has been a discussion on allowing corporate houses in banking, and there have been persuasive arguments both for and against the proposal. By far the biggest trepidation is about self-dealing, i.e. that companies might use the bank as a private pool of readily available funds. While there were rules that have been suggested against such "self dealing," there are gaps in those regulations that needed to be plugged. For instance, if a corporate has an interest in a bank as a promoter or a shareholder, but has no position on the board, then there is no prohibition on the bank lending to the corporate. This opens up opportunities for self-dealing. The Banking Regulation Act prohibits banks from lending to directors and to entities in which they are interested. Regulations also prohibit lending to relatives of directors without prior approval or knowledge of the board.

It has also been discussed during the public debate on the discussion paper that it is not easy for supervisors to prevent or detect self-dealing, as banks can hide related party lending behind complex company structures or through lending to suppliers of promoters and their group companies.

Though international experience on this issue is varied, the strongest point in favour of allowing corporate presence is that it can bring in capital and also business experience and managerial competence.

The government has been more particular or more concerned about the growth factor involved. It is more concerned about the capital required in the banking system and the scarcity of the same. If a large part of that capital has to come from the public sector banking, then it will go back to government’s coffers to make arrangements for that kind of capital. Hence, capital needed for the banking companies was a critical question before the government.

However, the Reserve Bank of India has to look at the stability. So, a balance needs to be struck between the two sets of ideologies; economic growth on one side, and stability, which is key to ensure the deposit holders interest.