Competitive Exams: Current Affairs 2011: Raising the bar Economy

Raising the bar Economy

The Reserve Bank of India recently took a measured step towards licensing new private sector banks by releasing a set of draft guidelines.

Allowing private players to start banks has always been a sensitive issue in India's recent history. More so when it is seen to benefit large industrial houses and business groups, whose questionable practices in banks they owned were one of the justifications for bank nationalisation that began in 1969. The limited attempts at licensing new private banks through guidelines issued in 1993 and 2001 do not offer any valuable lesson for current policymaking beyond the quite obvious fact that only banks with sound promoters do succeed.

The RBI has therefore done well to insist on sound credentials, integrity, diversified ownership and a 10 year track record. Prospective promoters should not have even a 10 per cent exposure to real estate and broking businesses. That is ostensibly meant to keep out those from speculative sectors.

The stipulation that a new bank can be set up only through a wholly owned non operative holding company is an important safeguard designed to ring fence the bank and its depositors from problems in related entities.

Necessary amendments to the Banking Regulation Act 1949 will be carried out to remove the restriction on voting rights while concurrently empowering the RBI to approve acquisition of shares/voting rights of 5 per cent or more by persons who are fit and proper. The RBI will get sweeping powers, for instance, to supersede the bank's board in certain cases.

The minimum capital requirement is fixed at Rs. 500 crore and the capital adequacy ratio at 12 per cent.

New banks will have an up to date technology platform from day one and ensure that every fourth branch is located in rural areas. Furthering financial inclusion is one of the main reasons for licensing new banks.

It is likely that only a small number of applicants will qualify and fewer still will be able to get the licence from an RBI appointed expert committee. The central bank has said that licences will not be issued to all those who qualify. It is clearly not about to open the floodgates.

Courtesy: The Hindu and Times of India