RBI suggests consolidation, continuous banking license among other things, for the betterment of banking in India
RBI on August 27 released a discussion Paper on ‘Banking Structure in India - The Way Forward’. The main theme of this paper was how to make Indian banks ready to support future growth of Indian economy and incorporate learning from recent global economic crisis. It has identified certain building blocks for the reorientation of the banking structure with a view to addressing various issues such as enhancing competition, financing higher growth, providing specialized services and furthering financial inclusion. This reorientation is targeted to impart dynamism and flexibility to the evolving banking structure, while ensuring that the structure remains resilient and promotes financial stability. The central bank has invited comments on this discussion paper and after deliberation on feedbacks it will finalize policy direction. We tell you the major areas which this discussion paper is talking about.
Multi layer banking structure: The discussion paper iterates that the reoriented banking structure would comprise four tiers. The first tier may consist of three or four large Indian banks with domestic and international presence along with branches of foreign banks in India. The second tier is likely to comprise several mid-sized banking institutions including niche banks with economy-wide presence. The third tier may encompass old private sector banks, Regional Rural Banks, and multi state Urban Cooperative Banks. The fourth tier may embrace many small privately owned local banks and cooperative banks.
Continuous banking licenses: RBI since liberalization in 1991 has invited application for private banking licenses after interval of about 10 years. However the central bank is now considering continuous banking license as the application window in always open. The discussion paper says “There is a case for reviewing the current ‘Stop and Go’ licensing policy and consider adopting a ‘continuous authorisation’ policy, as continuous authorisation keeps the competitive pressure on the existing banks and also does not strain the banking system as the ‘block’ licensing may do.”
Size and conversion of banks: Though RBI prefers to have some very large scale banks from India at global scale it finds merit in existence of small banks due to various factors such as supply of credit to small enterprises and agriculture and banking services in unbanked and under-banked regions in the country. However the central bank also outlines challenges such as issues relating to their size, numbers, capital requirements, exposure norms, regulatory prescriptions, corporate governance and resolution, that needs to be suitably addressed. The discussion paper also talks about exploring the possibilities of converting some UCBs into commercial banks or small banks.
Consolidation of banks: There is a need for consolidation as few Indian banks cater to global needs and the growing corporate and infrastructure funding needs. The discussion paper says “Taking into account the pros and cons of consolidation, it has to be borne in mind that while consolidation of commercial banks with established synergies and on the basis of voluntary initiatives is welcome, it cannot be imposed on banks.”
Dilution of government stake in PSBs: The Narasimham Committee had recommended reducing the government ownership in public sector banks to 33 per cent. The idea behind this was that it would help the government to reduce its allocation of scarce funds to recapitalize the banks from time to time. The paper suggests that there is a case for government to reduce its ownership stake in the PSBs. Government could also consider diluting its stake below 51 per cent in conjunction with certain protective rights by amending the statutes governing the Public Sector banks. Government also has the option of considering setting up Financial Holding Companies as recommended by the Report of the Working Group on Introduction of Financial Holding Company structure in India.