In India, Reserve Bank of India (RBI) is gearing itself to grant fresh Banking licenses. 26 applications are now under the consideration of RBI. The applicants include a diverse set of groups which includes
a) A department of the Government of India
b) 3 Public sector Companies
c) 4 large private sector groups
d) 11 Private sector NBFCs including a Housing loan company and 2 Infrastructure finance companies
e) 3 Share broking companies
f) A Gold loan company
g) A Currency Exchange company
h) A Mobile handset Company
i) A Management consultancy company
Many of the companies donot even need a second look for rejection.
The list indicates that there might not have been any strict pre application criteria and hence anybody with an intention of getting some free publicity has entered the fray even though they may get rejected in the next 4 months. They will be trading on the false reputation they have gained as “Applicant for Bank License” during the next 4-6 months and extract some benefit out of the same. If nothing else their share prices are likely to remain higher than normal and provide enough financial gain to provide justification for the application.
It was stated that RBI was not keen in allowing Share brokers and real estate operators to be considered for application but they were accommodated at the instance of the Ministry of Finance. Also while the RBI has indicated its reluctance to issue more than a few licenses, Ministry of Finance has indicated that there is no cap on the number of licenses to be issued.
A close observation of these developments indicates that there is already political pressure even at this stage diluting the norms for application. RBI will have to therefore resist further pressures at the time of finalization. If not several undeserving candidates will get the license.
In order to ensure that RBI retains control, and also appear not to have yielded to political pressures, it is necessary to emphasize that Indian Public have a stake in this decision of issue of licenses to Banks and therefore the system that RBI is likely to develop for evaluating the applications should be transparent to assure the public that their interests have not been neglected.
RBI has set certain criteria for evaluation such as “Capital Adequacy” and “Majority Public holding in the controlling company” which will be easily satisfied by most of the companies by hook or crook. These norms are essential but are not sufficient.
The second set of criteria for evaluation is the “Financial Inclusion” and “Priority Sector Obligations”. Presently many of the new generation banks are lagging behind in these criteria. Some of them are trying to cover their obligations by setting up “Representatives” in rural areas. RBI itself has admitted that there is a large scale mis-reporting to meet the targets.
Under the circumstances the newer of the new generation bankers who will now start operating will not find it easy to meet the Financial Inclusion and Priority Sector obligations. Even otherwise strong corporate conglomerates may come a cropper in this set of evaluation.
RBI has also indicated that they will use a “Fit and Proper” criteria. It is not clear what this may actually mean except that it may include the “Reputation” and “Previous track record” of the promoters. Most of the share broking, real estate and other smaller groups will fall way behind in the evaluation under this “Fit and Proper” scale. Even a few large groups may find that their past has not been glorious enough to sport the tag of a “Bank”.
The public sector organizations and the Postal department poses a challenge to RBI while evaluating the “Fit and Proper” criteria since reputation and trust worthiness of these organizations cannot be questioned. However their “Efficiency” in conducting Banking operations needs to be evaluated. There is no serious economic need for some of them to diversify from their present operations into Banking. Also these Banks are likely to be subservient to the interests of the respective parent departments. Ultimately these Banks can be misused by the political parties which are in power.
Except LIC Home Finance others donot seem to deserve a second look.
Even the Postal department needs to be considered ineligible since it is already doing Banking type of operations and in rural areas with the complete backing of the Government of India. They can very well develop and modernize their current Savings Bank, Term Deposits and Recurring Deposit operations without needing a Banking license. Hence despite other credentials, there is no need either for the Postal Department to seek a Banking license and subordinate itself to RBI or for RBI to take on the responsibility to govern an organization which it can never strictly monitor.
The real contention in the “Fit and Proper” criteria is therefore the ability of the applicants to carry on banking activity on a continuing basis generating deposits and lending it as per the policies of the RBI.
We can presume that RBI would do a good job in evaluating the applicants in a professional manner but the possibility of political interference corrupting the decisions at some stage cannot be ruled out. One way RBI can insulate itself from being pushed around is to maintain a high level of transparency in its decision making.
I also want RBI to recognize that there is a public interest involved in this decision and hence public should be taken into confidence before decisions are arrived at. Presently whenever a company raises capital from the public they issue a “Prospectus” under SEBI supervision and the signatories to the prospectus make themselves criminally liable to any mis-statements. The project plan in the prospectus also provides some idea on the quality of the management and prospects of business. Based on such prospectus, thousands of crores are raised from the public. In fact even the successful licensees have to approach the capital market and issue their prospectus when they raise the capital in the first three years.
Since RBI is issuing the Banking license based on certain business plans submitted by the applicants and their evaluation by RBI, and such license will empower the applicants to raise “Deposits” from the public apart from equity, even before the license is issued, it is better if the business plan of the individual applicants is declared to the public by a document on which the promoters provide a certain level of assurance. The final evaluation report of the RBI which will be like an audit report which is based on the evaluation of all the factors available before them should also be publicized and placed in public domain for a period of around 45 days during which public may provide some feedback to RBI after which a decision can be taken.
I am aware that in such a situation every applicant will receive adverse comments and there will also be an unfair slanging campaign against strong applicants. However RBI can choose to consider, evaluate and reject the objections as it may deem fit. This will at least ensure that RBI will not miss an opportunity to receive any genuine adverse information germane to its decision.
I therefore request RBI to publish the full contents of the applications received from the 26 applicants as a starting point for the licensing process, so that experts in the public may evaluate them independently and contribute their comments as an input to RBI. If instead RBI tries to rely on one or two consultants they may induct to their evaluation committee, public will carry an impression that they might be compromised given the high stakes involved.
(Ex Banker, Information Risk Mitigation Consultant and Founder www.naavi.org)