New Bank Licences to Indian Corporates - Reserve Bank of India (RBI) Viewpoint

An important characteristic of responsible regulation is not to be dogmatic but to be pragmatic, open minded and willing to change regulations to suit changing circumstances, provided larger public interest so demanded.

A few months ago, the Reserve Bank released guidelines on licensing of new banks in the private sector. In contrast to previous rounds of bank licensing, in this round, we have decided to make corporates eligible for bank licences. We did so after extensive debate, consultation and deliberation.

The main arguments against admitting corporates into banking were the following. First, banks are entrusted with large public deposits; corporates would misuse this large and cheap money for private gain by connected lending to their own units or to customers and suppliers. Second, the ownership structure of large corporates will open opportunities for regulatory arbitrage in case the promoter of the bank at the apex level is an unregulated entity. That could potentially lead to gaps in risk assessment and heighten the risk of contagion from the corporate to the bank and from there to the wider financial system. The third argument against corporates has been that banking in the hands of corporates would lead to concentration of economic power and political influence. Fourth, people asked why we need to take unnecessary risk by opening banking to corporates since there are enough potentially strong applicants outside of the corporate sector.

Indeed the criticism has been much more varied and nuanced than the way I have put it. My idea was just to give you the broad picture. At several stages over the last three years, we have responded to this criticism. Let me briefly summarize that.

The main reason we have allowed corporates is to leverage on their proven entrepreneurial talent and management expertise. Indian corporates have been innovative in penetrating into the hinterland, and the expectation is that the same spirit of enterprise will lead to innovation of new business models for financial inclusion. Large corporates will also bring vast pools of capital that will go into strengthening financial intermediation and making our banking sector more competitive. Moreover, corporates have been operating in other regulated sectors such as telecom, airports, power etc. They have also been allowed into other segments of regulated financial activities such as mutual funds, asset management, insurance etc.

In short, over time, the balance of arguments for and against corporates in the banking sector has changed. It is in response to this changed situation that the Reserve Bank took a pragmatic view and determined that allowing corporates into the banking sector would be net positive.

I want to acknowledge though that the arguments of the critics were non-trivial and we have been sensitive to that. That is the reason we have built several safeguards into the licensing regime by prescribing demanding criteria for the corporate structure, fit and proper criteria, corporate governance norms, exposure norms etc. There are requirements for dilution of the promoter groupís shareholding over time. There is also the in-built safeguard that corporates have large business interests at stake, and will be loathe to compromise their business reputation by mishandling the banking segment of the business. Finally, the Banking Regulation Act has since been amended to vest powers with the Reserve Bank to take action against the bank management should the Reserve Bank determine that the management of the bank has been detrimental to public interest or to the interest of depositors.

(Extract from Keynote address by Dr. Duvvuri Subbarao, Governor, Reserve Bank of India at IDRBT on August 2, 2013)


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