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Entry of new banks in the private sector - EY - India

Finesse: July-October 2011

Entry of new banks in the private sector

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Background

The discussion on new bank licenses began with the Finance Minister’s budget speech one- and-a-half years ago. The key needs identified included making the Indian banking system more sophisticated and efficient, and significantly enhancing the access of financial outsiders to banking and financial services.

The announcement envisaged that private sector companies would be offered the opportunity to participate in banking. Later, the regulator brought out a detailed discussion paper, which made the discussion even more involved and interesting. Several issues were covered in the paper, and views and comments were invited. These were summarized and published subsequently.

Views were very sharply divided on all the major questions raised, but there was a perception that these measures would meet their intended objectives.

The regulator laid out five basic criteria for discussion on the first draft guidelines:

  • Minimum capital requirements
  • Caps on promoters and other shareholders
  • Foreign shareholding
  • Eligible promoters
  • Business plan

In the most recent draft guidelines, the regulator has made further clarifications on important aspects such as:

  • Eligible promoters
  • Corporate structure
  • Minimum capital requirements
  • The holdings of non-operating holding companies (NOHCs)
  • Foreign shareholding
  • Corporate governance
  • Business models
  • Other additional considerations

The regulator also laid out the procedure that would be followed for grant of licenses.

The newly announced draft guidelines include additional information. To begin with, the regulator does not view the participation of foreign investors as bringing in larger capital into the country and perhaps suspects that promoters of new banking companies may not reduce their hold and equity once they get their licenses. There is adequate evidence from the previous licensing experience to support this impression. Furthermore, the aspect of the governance of a certain essential order from the banking sector is at the core of the debate. The extent to which the liability is leveraged in the common equity to deposits ratio requires enhanced control.

The draft guidelines seem to demand larger empowerment for the regulator to exercise the order of control. Several policy matters will therefore need to be addressed by the Government and the regulator to move this initiative forward.

Does this mean a long haul till the introduction of the new policy relating to bank licensing? Not necessarily, if the needs of the new regime are well understood and the steps that have to be taken are well articulated.

 


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