Bank licences: RBI may bet big on small NBFCs

May 21 2014, 21:34 IST
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SummaryReserve Bank of India (RBI) governor Raghuram Rajan indicated on Tuesday that the central bank could consider granting bank licences to smaller non-banking financial companies (NBFCs) along with restrictions on geographical reach.

Reserve Bank of India (RBI) governor Raghuram Rajan indicated on Tuesday that the central bank could consider granting bank licences to smaller non-banking financial companies (NBFCs) along with restrictions on geographical reach.

“The RBI can take more of a chance with new players if they get the licence to open only a small bank or to conduct only one segment of banking business,” Rajan said at an event organised by the Competition Commission of India (CCI) in New Delhi. “Such differentiated licences – licences with restrictions on the geographical reach or the products offered by a new bank – can generate more organisational variety and efficiency,” the governor added.

Stressing that state-owned and private banks will benefit from greater competition, Rajan said that smaller banks tend to be better at catering to local needs, including needs of small and medium businesses. “The RBI proposes to discuss further steps with stakeholders in this regard,” he said.

Rajan also hinted that in order to make banks more competitive with other financial institutions for lending on large projects, there could be a relook at the cash reserve ratio (CRR) and statutory lending ratio (SLR) obligations. “To the extent that banks raise long term bonds and use it for infrastructure financing, could we relieve them of such obligations? This will immediately put them on par with other financial institutions such as insurance companies and finance companies in funding long term infrastructure,” Rajan said.

Speaking on reforms for public sector banks (PSBs), Rajan said: “A number of eminently practicable suggestions have been made to reform PSBs. We need to examine all these ideas carefully, many of which will help give public sector banks the flexibility to compete in the new environment.”

Rajan did not quite agree with outgoing finance minister P Chidambaram's idea of Indian mega banks, which can compete on a global scale. “Rather than focussing on mergers (to form mega banks), it is better to have a good management structure and proper governance in place for all banks.”

He said that forced merger of banks just to create a big sized lender for better financing of mega projects could run into issues of culture and lack of synergies, and therefore was not practical. It was better to opt for voluntary merger of lenders, Rajan said, adding that the central bank had no fixed view on what should be the optimal size of a bank in India.

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