The Telegraph
Saturday , November 17 , 2012
Since 1st March, 1999
CIMA Gallary

Tussle over bank licence

Mumbai, Nov. 16: Finance minister P. Chidambaram and Reserve Bank governor D. Subbarao are sparring again.

This time the issue of contention between them is over when the RBI should kickstart the process for the grant of new banking licences to industrial houses.

Subbarao told reporters in Pune today that the RBI would not start the process until Parliament passed the necessary legislative amendments, clearly indicating that he wasn’t going to be hustled into action by the finance minister.

“We have been preparing to launch this process (of issuing new bank licences). But all the groundwork, all the enabling conditions for launching this work will first have to be fulfilled,” he said.

On Thursday, Chidambaram said the government had asked the RBI to start the process now so that it would be in a position to hand down the licences as soon as the legislative gridlock was broken.

The finance minister wants the banking regulator to finalise its guidelines and invite applications for new bank licences even before the Banking Regulation Act is amended.

“By the time the licence is issued and the banks come to existence, the act would have been amended,” Chidambaram had said.

The RBI wants certain amendments in the act that will bestow it with supervisory powers over private companies that enter the banking sector. It also wants legal powers to supersede the board of any new banking player if it detects any irregularities.

In his monetary policy announcement on October 30, Subbarao had indicated the RBI’s firm stand on the issue when he said, “we believed, we believe and we still believe that we need these powers to move forward. An amendment to the Banking Regulation Act is pending in Parliament to give us the necessary powers, authority and dispensation to deal with corporates entering the banking sector”.

Chidambaram believes “the power or the authority” that the RBI is seeking is already available in other provisions of the law and in the central bank’s own regulations and guidelines for new banking licences.

The RBI hasn’t ever issued banking licences to industrial houses. The last time it handed out new banking licences was in 2001.

The big boys of industry have been salivating at the prospect of breaking into an arena from where they have been barred for so long.

Several large industrial houses, including the Tatas, the AV Birla group, the Bajaj group, and the Ambanis, have evinced interest in entering the banking arena ever since former finance minister Pranab Mukherjee announced in Budget 2010 that the RBI would issue new banking licences.

The RBI governor said it would take at least eight to nine months to issue the first new bank licence if the act is amended in the winter session, which starts next Tuesday (November 22).

The RBI had issued the final guidelines in August 2011 for the licensing of new banks, including those floated by corporates. It stipulated an initial minimum paid-up capital of Rs 500 crore against the current requirement of Rs 200 crore.

It also said it would be looking to cherry pick industrial houses with squeaky-clean reputations, diversified ownership and with little or no exposure to the real estate and broking businesses.

The banking regulator said it would run a detailed background check on the applicants with other regulators and enforcement and investigative agencies such as the income tax department, the Central Bureau of Investigation (CBI), the Enforcement Directorate or others.

Those wanting to set up a bank will have to first establish a wholly-owned non-operative holding company (NOHC) that will hold the bank as well as all the other financial services companies. This is designed to “ring fence” the regulated financial services activities of the group, including the new bank, from the other activities of the promoter group.

The NOHC will have to hold a minimum of 40 per cent of the paid-up capital of the bank which will be locked in for a period of five years from the date of licensing of the bank. If an NOHC holds more, it will have to pare its stake to 40 per cent within two years from the date of licensing of the bank.

This isn’t the first time that the two have disagreed on policy formulation and matters of importance. Last month, Chidambaram was visibly upset after the RBI refused to trim rates and jump start a faltering economy, arguing that monetary policy had to be orchestrated in such a way as to clamp down on inflation first.

Subbarao today further indicated that the RBI did not plan to relax its vigil over rising prices with inflation riding at 7.45 per cent, which is far above the RBI’s comfort level of around 5 per cent. Headline inflation has fallen to an eight-month low of 7.45 per cent, stoking some optimism that the RBI might trim rates next month when it undertakes a mid-quarter review of the monetary policy.

A petulant Chidambaram told a wire agency in an interview in Mexico during the G-20 ministerial meeting that India’s growth could dip to as low as 5 to 5.5 per cent this year, which is the most pessimistic forecast made by either an official agency or an independent forecaster.