RBI to allow four new banks

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Finance Minister P Chidambaram after Thursday’s cabinet meeting. 	Anil Sharma Finance Minister P Chidambaram after Thursday’s cabinet meeting. Anil Sharma
SummaryReform: Move to promote financial inclusion, increase competition

In a much-awaited big ticket announcement that hopes to boost the financial sector, the Reserve Bank of India (RBI) is set to allow the opening of new banks and invite applications for licences this month.

A top government source said the central bank will issue the final guidelines for setting up new banks and invite applications before it releases its second quarter review of the monetary policy on October 30. It is expected to offer four slots for new banks. The move has been brought forward to give a sense of direction and purpose to the current phase of economic reform, the source added.

New banks are expected to make the sector more competitive and promote financial inclusion through greater access to banking services. Since liberalisation in 1991, the RBI has given licences to 12 private banks in two phases. Ten of these banks were set up on the basis of guidelines issued in January 1993. Two more got licences based on the revised guidelines issued in January 2001.

The RBI’s announcement now will imply that the central bank has accepted the government position that it is not necessary to wait for the enactment of the Banking Laws Amendment Bill before the final guidelines are issued. However, the new licences will be given only after parliament passes the bill.

Under the norms, industrial houses and entities with a significant presence in real estate and construction will not be eligible for bank licences. The minimum capital requirement for each bank is expected to be pegged at Rs 1,000 crore.

The RBI, however, has decided to keep in abeyance a proposal by a committee headed by Chief Economic Adviser Raghuram Rajan to allow small and mid-sized entities instead of large corporate houses to set up banks to enable financial inclusion. Sources said since this involves larger forbearance by the RBI of some regulatory norms, it has decided to examine the issue in detail later.

Norms for new bank licences have been delayed by more than two years. The RBI had originally issued a discussion paper on the entry of new banks in the private sector in August 2010, followed by the draft guidelines for bank licences in August 2011 and then issued a ‘gist of comments’ on the norms in July this year.

Previous finance minister Pranab Mukherjee had in the 2010-11 budget announced the RBI would issue guidelines for new banking licences by March

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