Bank licence to corporate houses: FinMin proposes, RBI disposes

When the guidelines for new bank licences were being framed, the finance ministry wanted industrial houses to get licences.

Contrary to the finance ministry’s initial idea that some large industrial houses could be given bank licences, the Reserve Bank of India (RBI) did not name any big corporate in the first round of licensing.

Four years ago, when then finance minister and now President Pranab Mukherjee had first expressed the government’s intent to issue licences to new private banks, it was widely believed the exercise was carried out for some big businesses. 

After that, the finance ministry and RBI were often seen at loggerheads on various issues with regard to the licensing process.

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But on Wednesday, as RBI announced only two names - IDFC and Bandhan - the finance ministry welcomed the move and found apex bank’s step in the right direction. 

“It will pave the way for more entities to come forward and expand the banking network. It augurs well for the economy and banking sector,” said Financial Services Secretary G S Sandhu. 

When the guidelines for new bank licences were being framed, the finance ministry wanted industrial houses to get licences to the extent that wide differences cropped up between the two.

RBI finally relented and agreed to the government’s demand to allow broking and real estate companies to apply for bank licences. 

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In an interview to Reuters Television in January last year, Finance Minister P Chidambaram had said he saw no reason why companies that fulfilled all RBI criteria should be denied banking licences. 

Asked why corporate houses were not given licences in this round, a senior finance ministry official said RBI must have thought something was not acceptable in their applications but going forward the central bank may issue licences on tap and these companies can rectify their applications and try again. 

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“The basic idea for issuing new bank licences was financial inclusion. It was felt a large section of the country did not have banking facilities despite RBI allowing banks to open branches anywhere,” he said. The official distanced the finance ministry from the process saying RBI did not consult it before naming the companies which were given the licences. 

The differences between the finance ministry and RBI became evident recently too when the finance minister said the Election Commission’s nod was not required for issuing bank licences, but the central bank went ahead to get the poll panel’s blessings before announcing the names.

Chidambaram later said RBI did it out of “abundant caution” though it was not needed in his view.

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BJP leader Yashwant Sinha said this was the most inappropriate time for issuing bank licences and RBI could have waited for the next government before deciding on the issue. 

In a report in September 2013, the Standing Committee headed by Sinha had proposed giving new bank licences to corporate houses and voiced concerns over the discretionary power vested with RBI for applying ‘fit and proper’ criteria for deciding on applications.

The members felt since there was no practice to give licences to corporate houses anywhere in the world, India should not be an exception.