The whole process by which the Reserve Bank of India (RBI) is close to issuing fresh banking licences offers a glimpse into how India is being governed. Though there is no real need for more banks since so many banks already exist and there is enough competition, in his Budget speech of 2010 the then Union finance minister Pranab Mukherjee announced that the RBI was going to issue new banking licences for two reasons. One, the banking system had to grow in "size and sophistication to meet the needs of a modern economy". And two, there was a need to "extend the geographic coverage of banks and improve access to banking services". Innocents assumed that the aim was to take financial inclusion forward.
But they were soon disabused of any such notion when the RBI brought out a discussion paper later in the year to evolve the norms for granting licences. It weighed the criteria for granting licences for the sort of banks already there and discussed issues such as minimum capital requirements, promoters' contributions, foreign shareholding ceilings and the eligibility of industrial houses and non-banking finance companies (NBFCs). While cross-country practices were examined, there was no attempt to look at examples of granting banking licences to microfinance institutions, the vehicle for promoting financial inclusion. With financial inclusion virtually buried, hereafter the issue that slowly assumed prominence was whether business houses would be eligible or not.
Then, after a full year of public consultation and discussion, in 2011 the RBI issued draft guidelines for licensing norms. But there was no progress since it was firm that its powers of supervision had to be extended before it could think of issuing fresh licences and the parliamentary logjam did not allow the relevant banking statute to be amended. Eventually, late last year, the amendment was carried and the RBI has now issued the guidelines, asking for applications. It should be obvious that the central bank has been dragging its feet and action has come after "consulting" the government - a euphemism for being pressured.
The result is there for all to see. Every conceivable entity - financial institutions, public sector organisations and, of course, corporate groups - is eligible to apply. In the public discussion through this period some experts, including Nobel laureate Joseph Stiglitz, have come out against granting licences to business houses, whereas government leaders have unequivocally favoured the idea. Obviously, an enormous amount of corporate lobbying has taken place.
It is not as if the RBI has given up without a fight. There is a long journey between being theoretically eligible and meeting all the criteria, and the RBI has laid down a formidable list of them. Foremost among them is that to succeed, an entity has to be "fit and proper", have a 10-year successful track record, be financially sound and have "sound credentials and integrity". To satisfy itself in this regard, the RBI will consult "other regulators and enforcement and investigative agencies". What if you have an insider trading charge hanging against you?
Financial inclusion has not been entirely forgotten. For an entity to qualify, it must have a business plan that promotes financial inclusion and 25 per cent of its branches should be in unbanked
rural areas. Since this implies that 75 per cent of its branches (and virtually all its business for quite some time) will be where the rest of the banking system operates, in order to keep succeeding the successful candidate will require a dual or split personality - be like a regular bank but not quite like one.
In this day and age, there is negligible chance of a repetition of what happened in the 1950s when Ramkrishna Dalmia, who then controlled Punjab National Bank, became the subject of a probe by the Vivian Bose commission into allegations of the diversion of funds from the bank and an insurance company (of which he was chairman), allegedly to make acquisitions. There is today little systemic risk in a business house or two owning a bank or two.
It makes sense for an NBFC to become a bank and for the financial arm of a corporate biggie (say, the financing arm of a car manufacturer) to become a bank. But given all the restrictions there will be to prevent a bank from extending help or accommodation to anything linked to its promoting group, the question really is: what is there in a bank licence for a large business group? It can access any amount of institutional finance at home or abroad, and a new bank will take a long time to make real money. A bank will allow a business house to dispense favours to lesser business mortals; beyond that, the most powerful business houses may be using their clout to own a bank simply because they find it prestigious to own a trophy bank.