Can’t bank on them? PDF Print E-mail
Thursday, 18 August 2011 00:00
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RBI appears to have convinced the finance ministry on the need to be cautious when it comes to issuing new licences for banks, and big corporate houses may not get banking licences at this point in time. Given that 24x7 policing end-use of funds is a difficult job, more so given the number of subsidiaries so many of India’s corporates have, RBI is a bit wary about the possibility of funds being diverted. Indeed, RBI’s experience with BCCI has made it realise that deciding on who is ‘fit and proper’ involves a lot more than just ticking off a host of boxes. It also suggests RBI has to have a lot of leeway in decision-making—the fact that regulators like Sebi are now in favour of consent orders where companies pay a fine but admit to no wrong makes it that much more difficult to decide on who is ‘fit and proper’. Given that banking licences for corporates have been a sticking point, the reported agreement between RBI and the finance ministry is a good thing.

At some point, probably sooner rather than later, the government and RBI will have to deal with another reality, that of who will set up and fund the banks India needs. Bank credit in India is around $1 trillion right now, and it needs to grow at around 20% each year. That takes it up to $2.5 trillion after 5 years, or $1.5 trillion more. Given RBI’s prudential norms, that means an additional equity infusion of $135 billion. A large part of this will obviously have to come from the government since PSU banks dominate the banking landscape, but a significant amount will have to come from the private sector. Corporate houses with deep pockets, and a reputation that gets others to invest in their equity, offer an obvious solution. More liberal licences to foreign banks is another option. Since many large Indian corporate also manage public money through their mutual funds, and there haven’t been too many complaints of the money getting misused, this should provide RBI some comfort. At the end of the day, given how banking lies at the heart of the economy, RBI has to have the last call on who is ‘fit and proper’.


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