ECONOMY

The tortuous road to new bank licences

Ø The process for issuing new bank licences is gathering pace. Reserve Bank of India (RBI) Governor Raghuram Rajan has said that a few licences will be issued by January 2014.

Ø  A committee headed by former RBI Governor Bimal Jalan is set to  vet the 26 eligible applications, after the RBI has scrutinised them initially.

Ø Stringent norms

Ø The applicants, drawn from the public and private sectors, had to meet the RBI’s stringent norms for setting up new banks.

Ø These, as set out in the RBI’s notification of February 22, include a minimum capital of Rs.500 crore and have sound credentials and financial track record of 10 years. Foreign capital will be allowed to an extent of not more than 49 per cent.

Ø Controversial issues

Ø A very large number of respondents to RBI’s discussion paper were not in favour of awarding licences to big business houses.

Ø However, such policy issues have been decided. A few large industrial houses will be given permission to start banks. Amidst the riveting interest on the subject, two related developments merit attention.

Ø Role for foreign banks

Ø Dr. Raghuram Rajan  hinted  at a larger role for foreign banks in India. In a speech in the U.S. he had said that foreign banks will be allowed in India, provided they incorporate themselves under Indian laws. Equally importantly, their governments must follow the principle of reciprocity, meaning that they must allow Indian banks to open branches there. Further, these banks will be allowed to buy a few local banks.