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BW Businessworld

Wait For New Bank Licences Just Got Longer

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For big conglomerates and corporates hoping to get into the banking business, the wait just got longer. Corporates like Tatas, Birlas, the Anil Ambani group, Religare, Bajaj and Muthoot group among others, will have to wait longer for a banking licence after the RBI governor D. Subbarao raised a reg flag over handing out the much-anticipated licences.

This came just days ahead of the scheduled release by RBI of the draft proposal on the entry of a new set of private banks into India's Rs 64-trillion banking
industry. A discussion paper was floated last August and the RBI has received a lot of feedback.

The Governor further said the RBI had already sent the draft amendment to the government, which was working on it. While the guidelines will be issued shortly, the amendment to the Banking Regulation Act is uncertain.

Subbarao said though admittedly the strongest reason to allow corporates to get into banking was their easy access to large capital, the issue of 'self-dealing'— the fear that corporates will use the bank as a private pool of readily available funds — made him raise the red flag.

For example, the Banking Regulation Act expressly prohibits banks from lending to directors on the board and to entities in which they are interested.

Regulations also prohibit lending to relatives of directors without the prior approval or knowledge of the board. Directors, who are directly or indirectly interested in any loan proposal, are required to disclose such interest and to refrain from participating in the discussion on the proposal.

"There are still gaps," the governor said while addressing the Ficci-IBA summit in Mumbai earlier this week. This could be the first time the RBI has openly expressed its apprehensions about handing out new licences.

Another apprehension that was raised during the public debate on the Discussion Paper was that it is not easy for supervisors to prevent or detect self-dealing
because banks can hide related party lending behind complex company structures or through lending to suppliers of the promoters and their group companies,
Subbarao said.

There is a need for changes in statutes and regulations to address these concerns, he said.

Although most bankers maintain that bringing in new banks will provide more competition to the PSU banks to up their ante when it comes to servicing, it remains to be seen how the corporates themselves react to this admission from the country's top most banker himself.