India's Aspiring Banks Line up for Licenses
India's Finance Minister, P. Chidambaram, wants more banks. So doesthe country's banking community and the financial sector. And theregulator in charge of authorizing new financial institutions -- the ReserveBank of India (RBI) -- seems to be finally ready to open the floodgates.Floodgates are an exaggeration, however. Though the number of seriousaspirants for a bank license could number more than 20, the RBI is notlikely to issue more than four; the smart money is actually on just two. (In1993, when the RBI licensed some private banks, it received 113applications. Nine got the green light.)More than 40% of the adult population in India does not have access to banking services so the need to expand coverage is obvious. A large part of the sector isgovernment-owned; most major banks were nationalized in 1969. But a significant jump in coveragemeans large investments and the government doesn't have the money. Nor is it ready to dilute its stake. New banks are therefore a must. The process was started by former Finance Minister Pranab Mukherjeein his February 2010 Union Budget. But the RBI has been dragging its feet: It issued draft guidelines inAugust 2011, invited comments and the matter has rested there ever since.The RBI's major objection was that it didn't have enough powers to regulate the new banks. The agencycould remove an errant director, but if an entire bank board connived in a fraud, it was helpless. NowChidambaram has taken away that excuse: The Banking Laws (Amendment) Bill, which gives the RBImore teeth, was cleared by the Lok Sabha (the lower house of Parliament) in December 2012, as a part of the government's new reforms package. The RBI's reluctance stems from one major reason: largeindustrial groups are now allowed to acquire banking licenses. One of the key reasons for thenationalization of banks was that many were controlled by large business groups that used public depositsto finance their own businesses. There were no Chinese walls and widespread allegations of misuse of funds.And the RBI is not alone with its reservations. "One of the real problems in the financial sector is thatthere are issues of conflict of interest," Nobel Laureate Joseph Stiglitz said while delivering the C.D.Deshmukh Memorial Lecture in Mumbai recently. "And when you have corporates owning their own banks, you are opening up a venue for corporate conflicts of interest." C. Rangarajan, chairman of thePrime Minister's Economic Advisory Council, has also advised the RBI to put licenses for conglomerateson the backburner. The first choice should be applicants that are not part of big groups, and only whenthese aspirants are found wanting should the RBI look at corporate, Rangarajan told the Press Trust of India. The International Fund has also warned the RBI against allowing corporate entities into this area.
A Mixed Record
The winners in the earlier round of bank license issuances have had a mixed record. There are successeslike ICICI Bank (which converted from a development financial institution), HDFC Bank and Axis Bank.But two new banks -- Centurion Bank and Bank of Punjab -- merged and were later acquired by HDFCBank. Global Trust Bank was taken over by Oriental Bank of Commerce after a major scam that saw itsnet worth practically wiped out. Times Bank also merged with HDFC Bank.The big business conglomerates that want a piece of the action include the Aditya Birla Group (AdityaBirla Financial Services), the Tatas (Tata Capital), the Ambanis (Reliance Capital), Bajaj (Bajaj Finserv)and the Mahindras (M&M Financial Services). Others include engineering giant Larsen & Toubro (L&T),
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