FE Editorial : Stiff banking conditions

Feb 23 2013, 02:19 IST
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SummaryThat the guidelines for new banks are out is good news because if the Indian economy is to grow at a brisk pace, all sectors need more credit—if GDP is to clock 15% growth, this means credit growth needs to double every five years.

That the guidelines for new banks are out is good news because if the Indian economy is to grow at a brisk pace, all sectors need more credit—if GDP is to clock 15% growth, this means credit growth needs to double every five years. RBI not excluding companies engaged in real estate or broking from entering the banking space is somewhat surprising given how even senior RBI officials have expressed their reservations about such entrants—which is why the draft guidelines had suggested that those entities that had more than 10% of their income or assets in real estate and broking would not be eligible for bank licences. Presumably, the central bank believes its screening process as well as its periodic inspections will be adequate to take care of any potential problems, but past experience of bank failures warranted a more conservative approach. Possibly the condition that prevents new banks from lending to any entities owned/related to the promoters (or even individuals related to the promoters) is meant to take care of this—the final word on whether groups are ‘related’ is to be RBI’s.

That said, some of the conditions appear stiff—asking new entrants to ensure that 25% of their branches are located in unbanked rural centres seems unfair since it would pressure the banks’ profitability in the initial years. Since banks need to list on the exchanges within three years of starting operations, they could have been given some time to expand their presence in the hinterland. In any case, forcing rural obligations has not worked in the past for any sector—in even telecom, where it was part of the licence conditions, rural penetration improved only once those markets turned profitable. Given that, as the adjoining column points out, 74% of all bank deposits and 82% of credit are accounted for by the top 200 centres, it will be a long while before rural branches are even remotely profitable. The fact that government-owned banks, who have less of an eye on the bottom line, haven’t made large forays into unbanked areas makes it clear the stipulation is onerous. In any case, given how banking correspondents are being tried out as alternatives to rural banks, the stipulation makes even less sense.

Asking promoters to pare their stakes to 20% in 10 years and 15% in 12 years appears a good idea from the point of view of corporate governance. However, the timelines could

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