Afzal Guru,convicted in the 2001 Parliament attack case, was hanged in Tihar Jail on Saturday, less than a week after India\u2019s President Pranab Mukherjee rejected his mercy plea. Guru was sentenced to death in 2002 by a special court. Ajmal Kasab, the Lashkar-e-Taiba militant, was hanged in November after the President rejected the clemency petition. Had Mukherjee, as finance minister, shown a fraction of the promptness of Mukherjee, the President, in pushing the economic reforms agenda of the world\u2019s second most populous nation, India\u2019s economic growth would not have been on the verge of dropping to 5%. His successor, P. Chidambaram, is aggressive in trying to overcome the so-called policy paralysis in the administration but even he too seems to have failed to nudge the Reserve Bank of India (RBI) to release the new bank licensing norms. This is even after amending the banking laws and empowering the central bank to supersede the board of a rogue bank and appoint an administrator for managing it for up to one year\u2014a necessary precondition to open up the sector, insisted by the RBI. The amended law also enables the central bank to inspect associated companies of the promoter of a bank.
\nThe law was amended in December and the RBI was expected to release the bank licence guidelines in January. But it has not happened and the speculation is that it may be released by the end of this month, coinciding with the Union Budget. If indeed that happens, the final guidelines of the new bank licensing norms will see the light of day three years after the finance ministry announced the plan to open up the sector to extend the coverage in Asia\u2019s third largest economy where 40% of the adult population still does not have access to banking services.
\nIndeed, there are certain critical issues on which the RBI and the government have different points of view but should it take three years to sort them out? One such issue is allowing entities with exposure to real estate and broking businesses to set up banks. The RBI has strong reservations on this but the finance ministry is not in favour of banning them. After all, banks too earn money from the broking business and loans given to the real estate sector. Of course, RBI can always remove the hurdle at the first stage, allow such entities to apply for a banking licence and still they may not get the final nod if they are not found fit and proper for the banking business.
\nAnother bone of contention is whether public sector undertakings should be allowed to set up banks. Initially, the idea was not to allow them\u2014one gets this impression from Mukherjee\u2019s February 2010 Budget speech: \u201cI am happy to inform \u2026 that the RBI is considering giving some additional banking licences to private sector players. Non-banking financial companies could also be considered, if they meet the RBI\u2019s eligibility criteria.\u201d But now, it seems, the government has changed its stance and does not mind public sector undertakings applying for a banking licence. The logic behind this could be de-risking the system and balance the corporate entry into banking. If this happens, Life Insurance Corp. of India, India Post\u2014a wing of the ministry of communications and information technology\u2014or even a company like Oil and Natural Gas Corp. Ltd will be allowed to set up banks.
\nYet another snag is that the government wants the central bank to take a holistic look at the entire banking sector before finalizing the guidelines\u2014do we need more small banks or focus on a few large banks? There are 77 banks\u201427 public sector banks, 20 private banks (old and new) and 30 foreign banks\u2014but none of the local banks has global scale. State Bank of India (SBI), the nation\u2019s largest lender, is the only Indian bank among the top 100 global banks in terms of tier I capital (equity and reserves). It improved its position to 60th in 2012 from 68th in 2010. India\u2019s largest private sector lender ICICI Bank Ltd\u2019s position is 110th. And there are four more banks\u2014Punjab National Bank, Bank of Baroda, Canara Bank and HDFC Bank Ltd\u2014among the 200 top banks in the world.
\nIn terms of assets, too, SBI is the only Indian bank among world\u2019s top 100 (in 2012, its position was 65th). And only five Indian banks, including ICICI Bank, are among the top 200 on this parameter.
\nLooking at the bigger picture, the RBI needs to decide whether it should allow two sets of new banks to open shops\u2014one, with higher capital (at least Rs.500 crore) for large national presence; and another, with low capital base, catering to specific regions. It also needs to figure out why the existing banks have failed to expand banking services to the hinterland and, if they have not found business sense in banking with rural India, why would the new incumbents get excited about it?
\nGiven a chance, everybody and his grandmother wants to set up a bank as it gives access to cheap money. So, it\u2019s only logical that the RBI will be very careful about choosing the fit and proper candidates but even that does not justify this inordinate delay. The RBI first released a discussion paper in August 2010 and a year later, in August 2011, it issued the draft guidelines on new bank licensing, seeking public comments. Since then, it has been in discussion with the finance ministry to prepare the final guidelines. With general elections a year away, more delay in finalizing the guidelines diminishes the chances of issuing any licence this year. One wonders who is suffering from policy paralysis\u2014the RBI or the finance ministry?<\/p>\n","protected":false},"excerpt":{"rendered":"
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