As the Reserve Bank of India (RBI) prepares to licence another round of private sector banks in India, a discussion paper released by the central bank argues in favour of continuous authoritisation of new banks as opposed to the 'block' bank licencing policy followed currently.
“There is a case for reviewing the present ‘stop and go’ or ‘block’ bank licensing policy, which promotes rent seeking and considering ‘continuous authorisation’ of new banks,” said the RBI in a discussion paper, titled “Banking Structure in India – The Way Forward”, released on Tuesday.
RBI argues that only the entry of well-qualified entities should be encouraged, which, in turn, would increase competition, bring new ideas and variety to the system. “However, it is important that the entry norms are stringent,” added the RBI.
The process of issuing a handful of new bank licences is currently under way. The RBI has received applications from 26 entities for a new bank licence, which are being screened internally before being referred to an external committee. Applicants include large industrial names like Tata Sons, Reliance Capital and L&T Finance and non-banking financial companies like Shriram Group, Srei Infrastructure and IDFC. The last round of licences was given out in 2003 and, before that, in 1993. While the need for new banks is acknowledged, the central bank also feels that a four-tier approach to banking may be useful – which would include large universal banks, mid-sized niche banks, regional rural banks and cooperative banks, along with small privately owned local banks.
“In a changing economic environment, there is a need for niche banking and differentiated licensing could be a desirable step in this direction,” said the paper.
In particular, the RBI feels that there is a need to promote investment banks / investment banking activities. While a number of standalone investment banks in the US failed in the aftermath of the global financial crisis, the paper says that lessons can be drawn from the crisis in order to frame an appropriate regulatory structure for investment banks. Other ares which could benefit from niche banking include infrastructure financing, wholesale banking and retail banking,