At a time when the banking sector is readying itself to open gates for new players, the Reserve Bank of India (RBI) will release a discussion paper on banking structures in the country in the next few days, said RBI governor Subbarao on the sidelines of a conference.
Highlighting some of the points that the discussion paper would address, Subbarao said public sector banks (PSB) will continue to dominate the sector in the foreseable future. However, since public sector banks may need significant additional capital under the Basel III norms, the government may need to either reduce its holdings in public sector banks or look at issuing shares with differential voting rights.
A holding company structure for public sector banks may also be considered, said the governor. ?There is sufficient headroom available to the government for dilution of stake in a number of public sector banks,? Subbarao said.
At the current level of shareholding, the government?s contribution to additional capital needs stands at R90,000 crore. However, if the government brings down its stake in PSBs to 51%, it will have to infuse capital only of R66,000 crore into banks, he said. Currently, the government holds as much as 82% of stake in smaller PSBs and 51-58% in large PSBs. PSBs are estimated to need a massive capital of R4.15 lakh crore by March 2018 to meet the requirements under Basel-III.
Commenting on the need for consolidation in the banking sector, Subbarao said the banking sector is skewed with the second largest bank being just 1/3rd of the size of the largest bank.
?Large banks can use power derived from their information monopoly to suppress competing institutions and markets,? Subbarao said.
Differing from Financial Sector Legislative Reforms Commission (FSLRC) recommendations, Subbarao said it?s essential RBI regulates both banks and non-banks for financial stability. FSLRC was constituted by the government for reviewing and updating financial sector laws. The commission released report in March and gave a series of recommendations.
One of the suggestions was to limit RBI?s mandate to monetary policy within 5-10 years and in the interim the RBI be allowed to regulate banks and payment system. Placing the mandate of regulating non-banks under a unified regulator and not under RBI could dilute financial stability and effectiveness of monetary policy, Subbarao said.
?For monetary policy to be effective, credit creation (by banks and NBFCs) should be regulated by RBI,? he said.
