The Birth of New Private Banks

Dr. Sanjiv Agarwal

After Bank of Rajasthan – ICICI Bank merger, while more old banks may fall prey to such inorganic growth hunger of banks wanting to become bigger in short run, another major development going to be in the banking space is the entry of new private sector players in the banking arena. It is no doubt that our banking system needs to grow in size and sophistication to meet the needs of today’s economy. There is a need felt to extend the geographic coverage and access of banking services. This calls for entry of new private sector players in the field of banking given the fact that 70 percent of banking is still dominated by 27 public sector banks. Reserve Bank of India (RBI) has very recently issued a paper on entry norms for new banks.

The new banking licences would result in expansion of banking activities and services and ensure financial inclusion, stability and soundness in banking system. Today many large industrial houses can use their resources to expend the reach of banking, especially in the rural India without compromising on the stability of the financial system. Infact, private players can leverage up on their managerial acumen and entrepreneurial skills to penetrate in unbanked areas and help in achieving financial inclusion.

For new banks, RBI has stipulated stricter capital requirement of Rs 300 crores with a cap of 50 percent for foreign ownership. While non banking finance companies will be considered for new licensees, real estate companies or promoters of such companies may be discouraged. Business houses could be considered but with proper safe guards as to arm’s length distance with banking business to avoid related party lending and transactions.

While RBI would impose entry level restrictions and have stricter norms on use of funds, it will have to be borne in mind that the promoters would also expect a reasonable return on capital. On use of funds , RBI even presently has exposure ceiling for banks which is 15 percent of capital funds in case of a single borrower and 40 percent of capital funds in case of a group. Subject to board’s approval, it could go up by another 5% percent for infrastructure projects and to 25 percent for oil companies which have issued oil bonds. There are exposure limits to real estate, capital market etc. Prudential limits and risk weightage will ensure neutrality of portfolio.

In case of business houses, business groups should be well diversified in terms of shareholding and majority of the board members must be independent including its chairman who should be a non executive. Not only this, promoters and directors would have to get clearance from various regulatory and investigative agencies. The idea is to have only serous players for entering the banking environment. It is even suggested that such new entrants could be asked to take over regional rural banks which are already starving for capital and business acumen.

Prudential exposure client’s duties or suppliers may not be allowed to benefit from the lending and discrimination of competitors could be checked. Entry levels based on higher capital requirement would also act as barrier.  RBI is also looking at a structure which could be such that the bank can be ring fenced from the other financial and commercial entities and activities of the group.

The entry of new banks is welcome in a country like ours where a major population is still deprived of banking facilities. This will certainly promote formal financial inclusion leading to inclusive growth, financial literacy and at the same time enhance competition resulting in improved quality of services at reduced costs. It is hoped that the new banks would be able to play a more meaningful role in financial inclusion and economic growth.