Money & Banking
Rangarajan bats for new banks

The PMEAC chairman also said that as new banks take at least two decades to achieve scale, the decision to allow new entrants must depend on what the economy needs over the next several decades

 
Mumbai: The Reserve Bank of India (RBI) should come up with entry norms for issuing new banking licences, says C Rangarajan, chairman of Prime Minister's Economic Advisory Council (PMEAC), reports PTI.
 
"If the domestic banking system is to remain competitive over time, there should be periodic entry of new banks. A closed system can only become oligopolistic (one with few players).
 
"Such a threat should now be eliminated and the central bank should lay down entry norms and also decide on who satisfies the criterion," Rangarajan said at banking award function organised by commodity bourse MCX.
 
The comments come amidst reports of the Finance Ministry nudging the Mint Road to go ahead with the licensing process as soon as possible.
 
The former RBI governor also said that as new banks take at least two decades to achieve scale, the decision (to allow new entrants) must depend on what the economy needs not today but over the next several decades.
 
The central bank, which issued draft guidelines for new banks last year, is yet to come up with the final guidelines as it seeks statutory powers to supersede the boards of erring banks, which can happen only through an amendment to the Banking Regulations Act, pending before Parliament.
 
Talking about new capital adequacy regulations such as Basel III, Rangarajan said it doesn't pose an immediate challenge but in the long-term, there is need of capital for our banks.
 
He also said the RBI's projection in its annual report about the capital requirement for Basel-III is an underestimate.
 
"The estimates for common equity capital in my view may turn out to be underestimate as the required non-equity capital may be difficult to achieve...while the private sector banks will have to meet these requirements by accessing the capital markets, public sector banks will require in addition budgetary support," he said.
 
The RBI Governor in the financial stability report released in August had pegged the capital need of banks at about Rs1.75 lakh crore by March 2018 to conform to Basel III.
 
Referring to rise in NPAs, Rangarajan said though the trend is disturbing, it is the fallout of the slowing economy.
 

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New banking licences: Clear the dead wood first!

RBI is probably investigating all the legal avenues that can give it adequate powers to directly intervene in the newly licensed banks in case they act out of norms and guidelines  

 
It may be recalled that a little more than two years ago, the then finance minister Pranab Mukherjee announced that licences will be given to private companies to set up commercial banks.
 
It has taken quite some time to prepare the draft licensing norms but the final version may take some more time since the Reserve Bank of India (RBI) wants to have adequate powers to directly intervene in the newly-established  (and licensed) banks should they act out of step with its direction and or act in an unacceptable manner.
 
The Banking Regulations Act, 1949, needs to be revisited to meet the changing economic scenario but that may require Parliamentary approval which may not be an easy task in the present political scene. To overcome this impasse, the RBI is probably investigating all the legal avenues open to it, so that the constitution that may govern the working of the newly set up banks give exclusive rights and final authority to the RBI only. At the same time the RBI is also able to control and direct the existing members of the banking fraternity.
 
There are several industrial groups involved which have shown keen interest to secure such a banking licence. Besides, they have the necessary capital base and most of them can bank roll a Rs500 to Rs1,000 crore initial capital if necessary. In fact, many of them have the operating financial expertise and are involved in related activities, apart from large industrial trade and manufacturing experiences.
 
To read about RBI’s initiatives in other areas, click here.  
 
But this delay and uncertainty is keeping them in suspense, including the unknown terms of reference to set up the banks, and are awaiting the final norms to be complied for submitting their applications. 
 
But what is the present scene in the banking sector?
 
The first and foremost act for the RBI is to bring out its final guidelines and norms and open them up for a debate. This will elicit public response from experts at large and help in finalizing the norms that will have to be compiled by a successful licensee.
 
The second and immediate steps should be for the RBI to encourage the merger, takeover and amalgamation of hundreds of small co-operatives and banks throughout the country. Such a move should be within a time-frame of 12 to 18 months and completed within six months thereafter.
 
The third step, also to be introduced simultaneously, is to ensure that branches are opened by existing banks in all towns and a cluster of villages to be grouped into a small banking sector area where no banking facility is available at the moment.
 
And, finally, existing banks should compulsorily send their trained officers to rural areas on 2-3 year assignments so as to gain first hand experience in dealing with the so-called small-time operators like farmers and village folks who have no idea of banking and who have been accustomed to whims and fancies of blood-sucking local money-lenders. The banks must aim to totally replace this group of moneylenders and directly help the farmer by not only giving financial assistance but also by imparting commercial knowledge of dealing with his ‘produce’.
 
To read more from the same writer, click here.
 
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US. He can be contacted at [email protected].)
 

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