RBI releases discussion paper on new banking licenses

The Reserve Bank of India (RBI) today released on its website a discussion paper on the question of issuing new banking licenses to business houses and non-banking finance companies (NBFCs) in the private sector.

The central bank has sought the views and comments of banks, NBFCs, industrial houses, other institutions and the public at large on the discussion paper.

It has invited suggestions and comments, in particular, on the following aspects:

--Minimum capital requirements for new banks and promoters contribution
--Minimum and maximum caps on promoter shareholding and other shareholders
--Foreign shareholding in the new banks
--Whether industrial and business houses could be allowed to promote banks
--Should Non-Banking Financial Companies be allowed conversion into banks or to promote a bank
--Business model for the new banks

According to an RBI press release, the suggestions and comments could be sent by September 30, 2010 to the Chief General Manager, Reserve Bank of India, Department of Banking Operations and Development, Central Office, 5th floor, World Trade Centre-1, Cuffe Parade, Mumbai-400005, or e-mailed.

After receiving feedback, comments and suggestions on the possible approaches discussed in the paper and detailed discussions with the stakeholders, comprehensive guidelines for licensing of new banks would be framed and applications invited for setting up new banks, it added.

The paper noted that Union Finance Minister Pranab Mukherjee had, in his budget speech for 2010-11, mentioned that the RBI was considering giving some additional banking licences to private sector players if they meet the RBI's eligibility criteria.

Later, RBI Governor D Subbarao had indicated in his Annual Policy Statement for 2010-11 that the RBI would prepare a discussion paper marshalling the international practices, the Indian experience as well as the extant ownership and governance (O&G) guidelines.

According to the paper, it is generally accepted that greater financial system depth, stability and soundness contribue to economic growth.

"But beyond that, for growth to be truly inclusive requires broadening and deepening the reach of banking. A wider distribution and access of financial services helps both consumers and producers raise their welfare and productivity. Such access is especially powerful for the poor as it provides them opportunities to build savings, make investments, avail credit, and more important, insure themselves against income shocks and emergencies," it said.

As of March 31, 2009, the Indian banking system comprised 27 public sector banks, 7 new private sector banks, 15 old private sector banks, 31 foreign banks, 86 Regional Rural Banks (RRBs), 4 Local Area Banks (LABs), 1,721 urban cooperative banks, 31 state co-operative banks and 371 district central co-operative banks.

The paper said that the average population coverage by a commercial bank branch in urban areas improved from 12,300 as on June 30, 2005 to 9,400 as on June 30, 2010 and in rural and semi urban areas from 17,200 to 15,900 during the peiod.

However, though the Indian financial system has made impressive strides in resource mobilization, geographical and functional reach, financial viability, profitability and competitiveness, vast segments of the population, especially the underprivileged sections of the society, have still no access to formal banking services, it said.

It is against this background that the RBI is considering providing licences to a limited number of new banks. It feels that a larger number of banks would foster greater competition, and thereby reduce costs, and improve the quality of service. More importantly, it would promote financial inclusion, and ultimately support inclusive economic growth, which is a key focus of public policy, the paper said.

NNN