RBI Pushes for Stiff Bank Entry Norms 

TOUGH TERMS: RED FLAG FOR BIG CORPORATES 

THE Reserve Bank of India favours stringent eligibility conditions for allowing new private banks, once again laying bare its deep unease at the prospect of allowing industrial houses into the banking business.
The banking regulator, which plans to approve a limited number of banking licences in line with the announcement in this years Budget by finance minister Pranab Mukherjee, has outlined a few policy approaches, or options, which if translated into rules may make it difficult for many big business houses to promote banks. In a discussion paper on the entry of new private banks released on Wednesday, RBI has said that one option could be to allow only those industrial groups which have a diversified ownership base and without any direct or indirect exposure to real estate.If some of the other suggestions too such as the need for corporate houses to obtain a clean chit from agencies such as the Central Bureau of Investigation, the Enforcement Directorate, income tax and other regulators, denial of the business groups brand name and logo for the new banks brand and a board packed with independent directors are endorsed later, very few large business groups may make the cut.
The paper, which invites comments till September-end, also says that it is important for the government to put in place enabling legislations to empower RBI to supercede the boards of private banks if the regulator feels that the bank is not functioning in the interest of depositors or financial stability. RBI last issued banking licences to YES Bank and Kotak Mahindra Bank well over seven years ago after it opened up banking to the private sector in 1994 during Manmohan Singhs tenure as finance minister. Since then,a few expert committees, including one headed by former RBI deputy governor SS Tarapore and advisor to the Prime Minister Raghuram Rajan, had made out a case for allowing industrial houses to promote banks.

LICENCE TO BANK 

Finance minister Pranab Mukherjee's announcement in this year's Budget that new banking licences would be issued had raised the hopes of several industrial houses and non-finance companies that had for long nurtured hopes of promoting a bank. Although RBI has not unveiled the eligibility norms, the discussion paper offers a peek into the regulator's thinking 

Is RBI going to free licensing of new private banks 

No. RBI has indicated that it will open the licensing window briefly to grant only a limited number of licences. Some of these might go to large finance companies that choose to convert or to regional rural banks that may be acquired by corporates 

Will business houses be allowed to set up banks 

The central bank has not said no,but has expressed concerns. A corporate seeking a licence will have to furnish an NOC from regulators and enforcement authorities. If it does get a licence, it would not be allowed to use its name, have its own people on board or lend to the group. Doors have also been shut on corporates in real estate 

Who are likely to get the licences 

RBI is clearly comfortable with solid NBFCs where its 'fit & proper' concerns are addressed. The strength of the NBFCs would be measured on their net worth and level of bad loans 

What will be the entry-level capital 

The capital requirement could start with 500 crore and go up to 1,000 crore 

Economic Times, New Delhi, 12-08-2010