RBI snubs banks on new licences

Bankers tried to do a "Bombay Club" on the Reserve Bank of India (RBI) on Thursday, but quickly fell in line after the regulator dismissed their concerns. The Bombay Club, which flourished in the 1990s, refers to a group of Indian industrialists who wanted a level playing field for Indian industry vis-à-vis foreign companies.

In this case, the competition is expected to come from new bank licensees, for which a discussion paper has been floated by RBI. At a meeting with the central bank, bankers opposed the entry of new banks, as there were enough players already. Newer entrants would only increase "unnecessary" competition and deplete their margins, top bankers told central bank officials.

But their enthusiasm proved short-lived, as RBI pointed out that any such discussion was pointless as the government has already decided to grant new licences. Finance Minister Pranab Mukherjee had announced during his Budget presentation in February that fresh banking licences will be issued.

Banks changed their tone immediately, but came up with suggestions that would result in higher entry barriers.

Almost all the banks were of the view that the minimum capital requirement for new banks should be Rs 1,000 crore. At present, the minimum net worth requirement for banks is Rs 300 crore.

The central bank had called a meeting of several industry associations, including the Indian Banks' Association, for their views on the criteria for granting new licences and who could be the eligible candidates.

Bankers also opposed the entry of industrial and business houses on the ground that it can lead to conflict of interest. Bankers pointed out that a potential area for such a conflict may arise from transactions from a bank and its affiliates.

"Some pointed out the possibility of instances where banks promoted by particular corporate houses deny loans to affiliates' competitors and favour their own affiliates," said an official privy to the discussion.

Among banks which were present at the discussion was State Bank of India, ICICI Bank, Punjab National Bank, Canara Bank, Bank of Baroda, and Union Bank of India.

Sources said bankers also raised the issue of submission of a workable business model which should not be altered once the banks start operating.

Several concerns were raised by bankers on the issue of user charges. "Banks formulate user charges keeping in mind the capability of Indian customers," said a source.

The issue of usurious user charges has been a matter of regulatory discomfort in the past and RBI has time and again emphasised on the fairness of user charges but restricted itself from issuing a diktat on how much a bank can charge its customers for particular services.

Regarding banking penetration and promotion of financial inclusion, banks said while granting branch licences, RBI should emphasise greater presence in rural areas. Some of the banks were of the view that new entrants should open three rural branches for one urban branch. The current norms prescribe a ratio of 1:1 — one rural branch for every urban branch.

Though the consultation process for granting fresh banking licences has begun, RBI insiders say it may take more than a year for the new licences to come through.

"The consultation process will ensure that views of all the stakeholders are taken into account. After this is over, draft guidelines will be issued and then the final guidelines. Prospective entrants will then submit their business models," a top RBI official said.

RBI will form a separate committee to vet the business model submitted by prospective entrants, which may also have representatives from outside the central bank, sources said.