In the Union Budget 2010, our country’s erstwhile Finance Minister (FM) – Mr Pranab Mukherjee enunciated that more banking licenses be issued in the Government’s agenda of inclusive banking and providing a fillip to the banking sector. Thereafter acting upon the same, the Reserve Bank of India (RBI) in August 2010 also issued a discussion paper on granting new bank licenses; after which draft norms thereto were issued. But in July last year the draft norms witnessed diverse views from important think tanks and policy makers and the existing banks opposed the move. Amid all this, the RBI wanted the Government to amend the banking laws thereby bequeathing them with more power, in order to facilitate the process of issuing new banking licenses. But now although in the winter session of the Parliament the crucial Banking Laws (Amendment) Bill, 2011 was approved, there's  yet a delay in issuing new banking licenses (despite the RBI had indicated that it will issue final guidelines onto the same by this month-end).

So what has caused such a delay?

Well, there is variety of reasons. But the main ones are:
 

• There seem to be a variance in what the finance ministry has suggested and that laid out in the draft norms issued by the RBI. The finance ministry is of view that real estate and brokerage companies be considered eligible for setting up banks, while the RBI has ruled out entry to such entities in its draft norms.
   
• Also, the recent update on the ‘Financial system stability assessment of India’ put up by the International Monetary Fund (IMF) said, “International experience has supported the prudent policy position of disallowing industrial houses from promoting and owning banks,” which has made the RBI rethink on the issue, as the aforementioned comment caution about the perils of issuing banking license to industrial houses.
   
• Moreover, recently Nobel laureate Joseph Stiglitz had also advised against giving licences to industrial houses for setting up new banks. Back home in India, the Chairman of Prime Minister’s Economic Advisory Council (PMEAC), Dr. C. Rangarajan had also suggested that preference should be given to the non-corporate sector in issuing the licenses.
   

We are of the view that, the aforesaid cautioning from the IMF and noted economists is indeed something to ponder upon on while the Government intends at inclusive banking and filliping growth in the banking sector. However, now the RBI would have to reinforce its whole logic of granting banking license to industrial houses. They would have to enunciate the long-term systemic risk involved in doing so. We think, the RBI will continue to be, rightly so, strict on actually issuing licenses and therefore, in reality one may not see too many “new banks” on the streets!

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