Friday, September 17, 2010


As declared earlier by government of India Reserve bank of India recently initiated action during the first week of August preparing to issue fresh licenses to set up new banks in private sector.

The RBI issued a discussion paper, seeking views of stakeholders on various issues such as minimum capital requirements for new banks and promoters’ contribution, minimum and maximum caps on promoter shareholding and other shareholders, and foreign shareholding in the new banks.
The Reserve Bank , in effect shook the business community and economists with a truly revolutionary discussion paper on how should new entrants be admitted into the Indian banking space. The discussion papers have not specified whether foreign banks would be asked to play a greater role in rural areas of India or not. This is an important issue that could be debated.
The questions has been raised by number of economist whether there are enough valid reason for issuing fresh licenses to start private Banks in the country? The past experience since 1963 of setting up of private sector banks has not been very encouraging. Only a very few survived. Some time it has become very difficult for RBI in allowing ailing bank to merge with a good nationalized bank to protect the interest of depositors. This action was taken in the case of Global Trust Bank.

RBI’s discussion paper seeks the views of public in general on the subject of entry of new bank in private sector

The central bank also sought views on whether industrial and business houses could be allowed to promote banks and should non-banking financial companies be allowed conversion into banks or to promote a bank. It is a fact that up till now no large industrial houses are allowed to setup bank in the country.

It invited views and comments of banks, non-banking financial institutions, industrial houses, other institutions and the public on these.

In his budget speech on Feb 26 this year, Finance Minister Pranab Mukherjee had announced that the government might issue more licenses to private sector banks.
Now question arises as to why Government of India is trying to issue more licenses in the banking sectors. Is it necessary? According to us expansion of banking system is necessary. But this did not mean more licenses need to be issued to new parties. It would have been wise to allow expansion of banking branch in those areas where banking facilities are not available. For example in state like Assam more and more branches could be opened. RBI should take conscious policy decision allowing existing banks to expand more branches in remoter areas of Northeast first. By merely giving more licenses for metropolitan cities would not help in all round development of industry and business of country as a whole. Though deposit rates of Northeast are high credit availability to weaker section of people is very low. It would be necessary first for RBI to over see that credit is made available in sufficient measures so that inclusive growth could be ushered in.
The banking should not be viewed only from the money lending business. think if you start looking at banking from the prism of asset management, from the prism of investment banking, from the prism of M&A, it becomes a serious contribution which foreign banks have been contributing to the country, leave alone the impact they have had on consumer banking here or in terms of some of the risk management tools

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