The Telegraph
Monday , February 4 , 2013
Since 1st March, 1999
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Tug-of-war over bank licence

New Delhi, Feb. 3: Differences have cropped up between the Reserve Bank and the finance ministry over the guidelines for new banking licences, which are likely to be announced within the next fortnight.

Even as the RBI has the final say in framing the guidelines, it has been holding consultations with the finance ministry over the last few weeks to iron out the differences, but without much luck.

The Reserve Bank wants the rules to be framed in a way that large corporate houses and real estate giants are not able to corner these licences as their business interests may clash with the prudential norms needed to run banks.

The finance ministry is firm in its stand that the norms should not keep corporate houses out, but rather set up a barrier between owners and banking operations.

Unfortunately for North Block, C. Rangarajan, the chairman of the Prime Minister’s Economic Advisory Council and a former RBI chief, has thrown his weight behind the central bank’s view.

After a string of collapses, the Indira Gandhi-led Congress government had nationalised most large banks in the 1960s. There were accusations of widespread abuse of public funds by bank owners, who siphoned off money to run risky businesses.

The RBI’s unwillingness to grant licences to corporate houses stems from this scary past and the fact that there is no way to ensure that the business houses will change their ways.

Similar considerations have also influenced the RBI’s opposition to real estate firms such as DLF, buttressed by examples of the mortgage crisis faced by American banks. It is feared that if realty firms are allowed to own banks, they will use them to fund property development and sell risky projects, which in turn could promote a property bubble.

Finance ministry officials argue that the powers of supervision which the RBI sought, including the right to supersede entire bank boards if they were suspects in wholesale frauds, have already been given through an amendment passed by Parliament. Hence, the central bank has no reason to bar corporate houses from banking.

One way out of the imbroglio, which is being suggested by officials trying to work out a solution, is that the rules should not specifically prohibit large companies from applying for licences. However, preferences would be built into the guidelines which would continue the current system where private banks are allowed as “graduates” from among merchant bankers and financial firms which had grown large enough to qualify.

However, among those to get the licences last time included some merchant bankers who failed to prove their worth. These included two banks — Centurion Bank and Bank of Punjab — which had to be merged and later acquired by HDFC Bank as well as scam-hit Global Trust Bank which had to be taken over by the Oriental Bank of Commerce.