Issue new banking licences only to Indian owned and Nationally incorporated banks, says Assocham

August 06, 2010: The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has recommended to Reserve Bank of India (RBI) to issue new banking licences only to Indian owned and Nationally incorporated banks so as to ensure that Financial Inclusion (FI) of aam aadmi with banking system is achieved as desired by government for inclusive growth and employment.

ASSOCHAM feels that the apex bank should observe extra precautions before it considers and rewards licences for new banking entities because cancellation of bank licence that commences business is often an impractical proposition under current legal framework. A study of compliance with conditions imposed on bank licences issued, including promises of priority to, say, agriculture would be helpful in devising correctives, and in the way forward?, argued ASSOCHAM.

The chamber has further stressed that it would be critical to ensure that such licences will necessarily serve developmental objectives because major banks in private sector that are now operating in India are incorporated in India but are predominantly owned by foreigners.

Further, the ASSOCHAM has pointed out that there have been instances where full and reliable information on the fit and proper ownership of promoters was not brought to the notice of RBI before issuance of licence. Therefore, putting in public domain every application and its accompanying information at every stage would avoid such misleading representations.

The guidance of ownership and governance issued in 2004 have helped in improving consolidation and strengthening of private sector banking. Hence, issue of new licences could ideally be considered broadly as per guidelines already in position.

The ASSOCHAM has further cautioned that legal aspects, both in letter and spirit should not be ignored. As per current legislation governing banks, voting rights are restricted to 10 per cent, whatever be the extent of actual ownership. When the RBI stipulates a higher percentage for a promoter?s ownership, an artificial slicing of ownership often becomes an operational necessity, and RBI becomes a willing party tot artificial slicing, this in a way undermining intent of law.

The amendments to existing Act also envisage strengthening the regulatory authority of RBI consistent with global best practices. In view of recent global experience with banking industry and India?s own experience, ideally, the proposed amendments to law could be carried out first and the new bank licences issued thereafter to reduce uncertainties to all concerned.

NOTE: Licensing of New Banks- The Finance Minister, in his budget speech on February 26, 2010 announced that the Reserve Bank was considering giving some additional banking licenses to private sector players. NBFCs could also be considered, if they meet the Reserve Bank’s eligibility criteria.

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