It?s good to see the Reserve Bank of India (RBI) assert itself. It seemed, for a while, that the central bank was giving the finance ministry?s views way too much weightage but the draft guidelines for new banking licences are evidence that RBI is not about to do what it does not believe in. If the discussion paper on new bank licences, put out in August last year, showed how diffident the central bank was about allowing large industrial houses into the banking space, the draft guidelines reaffirm that it remains so.

While it does not say so openly, there is little doubt that RBI does not really wish to have large industrial conglomerates as part of banking industry unless they have an absolutely unblemished track record. So, a clean image is top of mind for the regulator and one line in the guidelines says it all: ?RBI may seek feedback from other regulators and enforcement and investigative agencies such as the IT dept, CBI, enforcement directorate on various aspects such as sound credentials and integrity?. One wishes RBI had altogether disallowed large industrial groups from setting up banks or at least gone a bit further to say that any black marks given to a promoter group, by any regulator or investigative agency, would put it out of the reckoning forever. While that may seem somewhat harsh, the fact is that once the doors are opened to corporates, one or two not-so-eligible candidates could slip in at a later stage, making life difficult for everyone else. So, even while there are, no doubt, some meritorious candidates, the Indian banking industry isn?t quite ready for the entry of business houses.

Indeed, even with the best of regulatory safeguards at its disposal, the regulator will not have an easy time. And that includes having 50% of the directors on the board being independent. Or a holding structure that would ringfence the banks from potential risks of the promoter?s other business interest. For starters though, it?s not a bad thing that the regulator frowns upon promoters dabbling in real estate and broking?RBI does not mince its words when it says broking businesses ?represent a business model and business culture which are quite misaligned with a banking model?. Going by the number of instances that Sebi has brought to light, of rules having been broken, it will be a while before the broking industry earns itself a better reputation.

As for real estate firms, they don?t seem to be able to manage their own debt and have caused our bankers enough grief, so it?s no surprise they?re not welcome. It?s also important to ensure that the new crop of bankers isn?t controlling too large a share of their existing businesses by insisting on a diversified ownership. Also, the central bank wants to know, and rightly so, the source of the promoters? equity?it is now well-versed with promoters? tricks of using multiple layers to obfuscate the true ownership and surely those who resort to such practices have no place in the banking arena. In fact, RBI has been rather generous in allowing a new bank to lend as much as 10% of its book value to any entity in the promoter group and as much as a fifth of the book value to all promoter entities in aggregate. For those who believe that RBI is being too conservative, all one can say is that they?re not keeping themselves abreast of all the scams, how many top corporates have been involved, and the increasingly deepening nexus between industry and politicians.

Indeed, RBI has done well to put its foot down on the issue of restricting foreign direct investment in new banks, to 49%; the finance ministry had reportedly believed it would send out wrong signals to investors and has asked the regulator to clearly enunciate, in the guidelines, that new banks would be exempt from Press notes 2, 3 and 4. RBI, for its part, wanted the limit rolled back from 74% to 49%; it was uncomfortable with a higher limit, given the country?s intelligence agencies? limited success in unearthing the identities of the true owners of the banks. RBI is right, we do not need to pander to the wishes of foreign investors and 49% allows enough room for them to invest. Moreover, the draft guidelines say no foreign shareholder can directly or indirectly hold more than 5% whereas the finance ministry was reportedly pushing for a minimum of 10%.

RBI is also right in saying the promoter?s holding should be brought down to 15% and not 20%, as the ministry had reportedly suggested; the guidelines allow for it to happen in two phases. Also, a listing within two years should not be difficult though it?s true banks might not get the kind of valuation they want. After all, they will have to hit the ground running in opening a fourth of their branches in rural centres, which will drive up their costs without fetching them enough revenues. Additionally, they have not been let off from meeting priority sector lending targets like other banks. At R500 crore, the entry barriers are very low and will not shut out genuine entrepreneurs. We do not, of course, want a repeat of Centurion Bank. What the country needs is a clutch of new bankers who earn the customer?s confidence.

shobhana.subramanian@expressindia.com