The reported differences of opinion between the Reserve Bank of India (RBI) and the finance ministry, over the norms for the entry of new players into the banking sector, make for a lively debate. To begin with, the finance ministry believes that RBI?s suggestion of restricting foreign direct investment in new banks to 49% would send out the 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, wants the limit rolled back from 74% to 49%; its discomfort stems from the fact that it?s hard to figure out who the ultimate beneficial owners of a foreign stake could be, given that our intelligence agencies are not always up to the task. The central bank is, therefore, right in not wanting such a large chunk of the shareholding to be in foreign hands.

RBI is also right in saying the promoter?s holding should be brought down to 15% and not 20%, as the ministry has reportedly suggested. If the bank is listed on the exchanges in a couple of years, the dilution of the initial 40% holding could happen over the next three or four years, ensuring that the lock-in period would be at least 5 years. If the finance ministry has its way, no other shareholder can hold more than 10% of the equity, which is perfectly fine. Since voting rights for private sector banks are going to be aligned with their shareholding, investors should not have any concerns on that front.

RBI?s suggestion of R500 crore as start-up capital is perfectly reasonable as is the finance ministry?s take that it be upped to R1,000 crore in 5 years; the first ensures that too high a capital base doesn?t become an entry barrier for sound candidates while the second would make sure that the bank is able to grow.

Where the regulator and the government seem to concur is with respect to the holding company structure, which RBI has said is a must for new entrants. It?s hard to disagree with the structure because there?s no other way the regulator can block out risks to the core banking entity from other businesses like insurance or broking. However, the government seems to be more conservative than the central bank when it comes to giving banking licences to business groups that have a presence in real estate; it has reportedly said they can?t be part of the banking sector. RBI had been a tad more lenient, saying those firms that derived 10% or more income or assets from real estate should be asked to stay away but the finance ministry is perhaps acknowledging the Indian promoter?s talent for fudging numbers. If the finance ministry?s views prevail, business houses like those of the Tatas or the Mahindras?which have among the best track records in Indian industry?would be left out, which would be a pity, especially if other industrial groups are given banking licences. RBI would have given the matter of a presence in the real estate business some serious thought and so it?s better to go with what it says.

When it comes to the broking business, though, the ghost of Harshad Mehta, it seems, still haunts RBI. The central bank doesn?t want any group that earns 10% or more of its revenues from broking to enter the banking space. While this would dash the hopes of the several brokerages aspiring to become banks, it would be in the best interests of the banking sector. While it is not our intent to preach to the learned, we do hope the central bank will also keep in mind the track record of financial services companies with regard to their activity in the capital markets space. The capital market regulator has been fairly efficient in bringing to book those that may have violated the rules, but there have been several instances where the cases have been resolved through consent orders or plea bargains. The new guidelines for banking licences must, in some manner, take note of the history that business groups have with regulators, whether it is Sebi or Irda; after all, it is the small saver?s money that will be at stake. And the initiative for this will have to be taken by the central bank.

The ministry and RBI also seem to hold different views on how much of a financial inclusion agenda should be pursued by the new banks. While RBI had suggested that the new banks should set up at least a fourth of their branches in rural towns with a population of less than 10,000, the finance ministry is happy with them putting up a fourth of their branches in tier-3 to tier-6 cities, with a population of up to 50,000. In all fairness, it would be unfair to ask new players to shoulder too much responsibility while making banking accessible to the unbanked and, to that extent, the finance ministry?s conditions seem reasonable. More than the nitty-gritty of branches and so on, what?s important are the credentials of the promoters who are going to be running the banks and, without belabouring the point, it would be nice to have a crop of new bankers with credibility. The discussion paper reflected how uncomfortable the central bank was about giving licences to large industrial houses. ?The complex web of relationships of commercial firms, with their customers or suppliers, and proper monitoring of preferential access to credit would be very difficult,? RBI had noted. Since it will be RBI?s reputation that will be at risk, it should fight for what it believes in.

shobhana.subramanian@expressindia.com