New banking licence or old banks with new names?

With some sixty days to go for the much hyped new banking licences, the recent news of the Parliamentary Standing Committee on Finance expressing serious views that the guidelines may lead to corrupt practices, makes one wonder what these guys were doing so long
 

The last date for submission of applications for obtaining a new commercial banking licence to the Reserve Bank of India (RBI) is 1 July 2013, but a storm is brewing in the horizon.

 

The Parliamentary Standing Committee (PSC) on Finance has almost vetoed the idea in one voice, on the sole fear that the guidelines drawn would invariably lead to corrupt practices.

 

Chairman of this panel, Yashwant Sinha (BJP) is also not in favour, and has cited examples of the US where, despite its capitalistic and commercial attitude, have not favoured the issue of corporate players entering the banking field.

 

Earlier, Dr Subbarao, RBI governor had reiterated that banking licences will (or may be) issued to private or public sector entities provided they have sound financial credentials and minimum track record of ten years to start banks. Of course, there is an inherent fear that such institutions, if established, may tend to extend favours to their own corporate associates!

 

The PSC has expressed fears that guidelines drawn may lead to ‘corruption’. However, the panel did not choose to amend, correct or even suggest means to overcome such possibilities.  While we may learn from the experience of other countries, we must remember that our system of financial governance has not permitted banks to go belly up, as they do in several countries, including the US.

 

The public are not fully aware of the guidelines drawn by RBI.  However, what has happened in West Bengal (Saradha case) is an eye opener. Chit funds operate with impunity just in the same manner as deposit collectors!

 

So, let’s toss a few ideas in the ring:

 

a) Why not allow all the co-operative banks to mandatorily merge with existing banks?

     This may include all other small banks which are still operating in the country.

 

b) If any new banking licence applicant comes forward with a specific proposal to take over the co-operatives or similar banking institutions, will it have a preferential treatment?

 

c) If and when the new bank licencee establishes its registered office in a particular state, it will undertake to open its branches in all the designed metropolitan cities and towns, approved by the RBI, but, within the agreed “time frame” ensure that every town in that state will have its branch. Also it will then identify that the move will be to expand its branch network to the neighbouring states, until the operations become pan-India. The RBI can work out a master plan to ensure that in a decade or so, the whole country is covered, and banking operations extended where it did NOT exist before!

 

d) There are some banks like Central Bank of India (one of the original Five) whose operations are in doldrums. New private banks which were recently licensed have made great strides while CBI is moving at a snail’s pace. Even when CBI celebrated its 100th birthday, there was no reward for its shareholders!  It is time government unloads deadwood like this bank and let private enterprise take over and perform.

 

e) The RBI must encourage corporate bodies, it does not matter whether the proposal comes from the Ambanis, Birlas, Bajajs Mahindras, Jindals or Tatas or whoever, to take over existing banking institutions and infuse the required capital and experienced banking personnel

 

Finally, even before the issue of new banking licences is settled, it is time Dr Subbarao recognizes the urgent need to review and increase the deposit insurance cover of Rs1 lakh (as at present) to a realistic figure of say Rs25 lakh for an individual or Rs50 lakh for a couple, if held in joint names. While savings are encouraged, the insurance cover of Rs1 lakh necessitates the account holder to open in accounts in number of banks to protect his savings. This ludicrous coverage must be revised immediately.

 

(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.)

Comments
Rajeev Sharma
1 decade ago
While you talk about this need for increasing the network of branches, it should be seen that viability is kept in mind. Already Nationalised banks have been carrying loss making rural branches where only a few customers turn up. Why increase the losses by opening more branches in remote locations and burden the banks with unviable loans. Finally, allowing corporates to open banks will only increase misuse of funds by these companies.
Harish
1 decade ago
for me, RBI must avoid giving new banking licence to Corporates. Why ?, We can debate the issue.
Nimesh Khakhariya
1 decade ago
There are so many nationalized banks not working efficiently, why RBI don't care for that? UKO bank didn't have cheque books for a month long period. Once i went to Central Bank of India to open my account and deposit money in Ahmedabad I got answer that today we don't have sufficient staff come on any other day!! Some of the co operative banks have given free hand by few corrupt officials of RBI and as a result innocent depositors are loosing money. The same thing will happen with new banks of Corporates.
Nimesh Khakhariya
1 decade ago
There are so many nationalized banks not working efficiently, why RBI don't care for that? UKO bank didn't have cheque books for a month long period. Once i went to Central Bank of India to open my account and deposit money in Ahmedabad I got answer that today we don't have sufficient staff come on any other day!! Some of the co operative banks have given free hand by few corrupt officials of RBI and as a result innocent depositors are loosing money. The same thing will happen with new banks of Corporates.
R Balakrishnan
1 decade ago
I strongly feel there is a need to prevent business houses from entering banking. We have enough and more banks. More licenses would be more crony lending and siphoning. Whatever we try, banks will be fertile grounds for robbery. So long as debt recovery laws are benign banking is a screwed up industry. Do not go by experience of banks like HDFC Bank etc which are bound to change for the worse over time. Corruption and money go hand in hand. Remain a sceptic and you will never be disappointed.
Obviously this round of licensing is being done to favour one or two special biz men who have partnered / fronting for some guys in the government. It is so obvious. RBI does not want to issue licenses but is being forced to.
Veeresh Malik
1 decade ago
More importantly, there needs to be some sort of regulatory body awarding competencies before anybody and everybody can be called a "banker". As on date, so many of these "bankers" give void empty looks when you mention RBI to them.
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