Govt weighs ordinance to speed up new bank licences

Written by Sunny Verma | Arun S | New Delhi | Updated: Oct 19 2012, 23:10pm hrs
With amendments to the Banking Regulation Act (BRA) hanging fire, the government may explore the option of issuing an ordinance to enable the Reserve Bank of India (RBI) to award new bank licences, sources in the finance ministry said. The Banking Laws (Amendment) Bill, 2011, has been introduced in Parliament but not passed. Since the government is keen that the central bank issue final guidelines and invite applications for new banks, it may explore the option of an ordinance so that the RBI is armed with powers to supersede the board of a bank.

FE had reported last week that large industrial houses as well as aspirants with a significant presence in real estate or stock broking are unlikely to be given licences. Winners of the three or four licences that the central bank may hand out this time around will, in all likelihood, be non-banking finance companies (NBFC), with sources saying NBFCs promoted by big business houses may find themselves on the list.

The finance ministry feels the present regulatory arbitrage one set of rules for banks and another, relatively easier norms for NBFCs should be eliminated in the long run. Sources said granting bank licences to NBFCs in the first round and the pointer towards doing away with this regulatory arbitrage will also encourage more of them to set internal goals to come into the banking fold. The current practice of granting a limited number of bank licences is creating an artificial scarcity, which is not good in the long-term for competition and the governments financial inclusion programme, they added.

Changes in the BRA will give RBI powers to supersede a banks board in case of any wrongdoing and to supervise subsidiary companies of a banking entity. The RBI believes new powers are vital in effectively regulating the new entities, protecting the banking system and safeguarding depositors interests.

The possible use of the ordinance route follows the governments strategy to push through new bank licences without having to wait for the time-consuming process of getting the amendments passed by Parliament, especially considering the obstructionist opposition parties, the sources said.

The government may be able to get the amendments passed in Lok Sabha, but may find it difficult to do so in Rajya Sabha, where it is clearly in a minority. This could further delay the process of issuing bank licences. The finance ministry, therefore, is discussing with the RBI to find a middle ground, which ensures that fresh bank licences are issued while regulatory concerns are taken care of.

It (ordinance) is an option we have a last resort, an official said, conceding that since the Bill has already been tabled in Parliament, there will be propriety issues regarding issuing an ordinance. The ordinance, if issued, will address concerns raised by the RBI, including being empowered to inspect the books of corporates with bank licences and powers to supersede bank boards in certain circumstances to avoid systemic risks.

The government which is eager to take the RBI on board on fast-tracking the matter will hold another meeting with the banking regulator shortly, sources said.

Meanwhile, constitutional experts said while the government has the powers to push through an ordinance, it is usually done only in exceptional circumstances meriting an urgency, and when Parliament is not in session. Besides, the life of the ordinance is only six months, after which Parliament should convert it into a legislation.

It (ordinance) is only a pro tem (temporary) measure, an exception which has to cite the urgency. Anyway, the Parliament has to ratify it, so it is actually a double job for the government, senior advocate and Supreme Court lawyer Aryama Sundaram said. If the reasons for the urgency are not convincing, an ordinance can attract political criticism, he said, adding even a private member (member other than a minister) can move a Bill seeking to replace an ordinance.

Official sources have ruled out increasing foreign direct investment (FDI) limit in new banks from the currently proposed 49% to 74%. The minimum capital requirement for each bank is expected to be Rs 1,000 crore. The RBI last gave licences to 12 private sector banks in two phases since the financial sector was opened up in 1991. The RBI issued the draft guidelines for bank licences in August 2011 and final norms now are expected to be unveiled soon.