Notwithstanding the finance ministry's initial prodding to go big on new bank licencing, the Reserve Bank of India (RBI) has got the ministry to toe its cautious line on how to expand the banking sector in India. The ministry and RBI have come to an understanding that big corporate houses ought not to be allowed to enter the banking business at this juncture.

The move is in recognition of the risk to banks' integrity from the corporates' other business interests and the paramountcy of maintaining domestic financial stability in times of global crisis. 

Official sources said a maximum of four new banks would be allowed and these would be promoted by pure-play NBFCs subject to the central bank's strict eligibility criteria. There would also be a condition that promoter holding in the bank, to be set at 40 per cent initially, would be reduced within a rather tight time-frame. The move dashes the banking hopes of corporate majors like Tatas, M&M, ADAG, AV Birla Group and L&T. As the definition of "big industrial/business house" is ambiguous, the fate of even other aspirants such as Indiabulls, Shriram Finance, Religare and Srei is rather uncertain because they, too, have significant cross-holdings in group firms. The new licences would likely be available for institutions like IFCI

"It (deciding if any applicant has significant interests in other group businesses which may impact the integrity of the bank) should be an objective test, rather than one of perception," said Hiresh Wadhwani, partner (financial services), Ernst & Young.

Currently, banks are allowed to have an aggregate 74 per cent foreign holding with a cap of 5 per cent for a single investor. For new licensees, the policy will be stricter, with aggregate foreign holding cap (including FDI, NRI and FII) at 49 per cent, with a condition that a non-resident won't hold than more than 5 per cent of paid-up capital. The minimum paid-up capital could be set at Rs 500 crore, compared to Rs 300 crore for existing banks, sources said.

The new banks will have to mandatorily open a certain number of branches in rural and semi-urban areas. This is to honour the government's objective of financial inclusion, even as the country's banking system grows in size and sophistication to meet the needs of a modern economy.

A top source said the finance ministry has formally conveyed to the RBI its willingness to accept the central bank's views on having a calibrated, rather than sudden, expansion of India's private banking sector. The RBI will soon announce its guidelines for new banking licences.

The RBI's move to not let "promoter groups" (read big industrial and business houses) into banking would look like a climb-down from the position it took in a recent note to the finance ministry. In the note, the central bank had summarised its views on new bank licences and foreign shareholding in Indian banks, following the August 2010 discussion paper and comments received on the same. The RBI had spoken in favour of allowing big corporate groups to set up banks through the wholly-owned NOHC route.

FE

Cautious Move

* The finance ministry and RBI have come to an understanding that big corporate houses ought not to be allowed to enter the banking business at this juncture

* Sources say a maximum of four new banks will be allowed and these will be promoted by pure-play NBFCs

* The move dashes the banking hopes of majors like Tatas, M&M, ADAG, AV Birla Group and L&T

* The fate of aspirants such as Indiabulls, Shriram Finance, Religare and Srei is also rather uncertain