The gist of the reactions from various quarters to the Reserve Bank of India's (RBI's) discussion paper on entry criteria for new banks in the private sector, as published by RBI, shows that most would like RBI to ensure utmost transparency and discretion in the next stage of growth of Indian banking.
Merely because India was saved from the ravages of the global financial crisis, on the one hand, and because the government of the day is committed to "financial inclusion", on the other, does not warrant reckless liberalism in the criteria adopted for entry of new private sector banks.
Utmost care must be taken to ensure that new bank licences are given to credible applicants.
A variety of views have been expressed both on the issue of what measures must be put in place to address the objectives of financial inclusion, and on the issue of whether industrial houses should be allowed to set up banks.
There, however, appears to be a consensus that RBI should adopt a step-by-step approach even in evolving the "fit and proper" criterion for entry of new private sector banks.
The report quotes an "eminent economist" suggesting that as a first step, private banks may be restricted to "traditional banking" with permission to conduct "full-fledged banking" operations after a period of time during which the bank's performance is assessed.
This and other such cautionary advice is well taken and particularly relevant to our times. It should not be that in the name of "financial inclusion" weaker entry norms are adopted.
The discussion paper, it may be recalled, listed six items against which the Indian and international experience was reviewed.
These were: (i) minimum capital requirements for new banks and promoters' contribution; (ii) minimum and maximum caps on promoter shareholding and other shareholders;
(iii) foreign shareholding in the new banks; (iv) whether industrial and business houses could be allowed to promote banks;
(v) should non-banking financial companies be allowed conversion into banks or to promote a bank; and (vi) business model for the new banks.
While there appears to have been greater diversity of opinion on the question of minimum capital requirements and promoters' shareholding, on most other issues the consensus is veering around to a cautious approach rather than bravado in the name of privatisation.
Apart from the global environment, which has become more risk-averse, the domestic debates on crony capitalism and dubious political involvement in economic policymaking have queered the pitch for the policy on entry criterion for private banks.
Better safe than sorry, is the dominant mood among policymakers at this point in time. Interestingly, of all the issues debated, the one that seems to have generated most comment is that relating to whether industrial houses should be allowed entry into commercial banking.
Four different arguments have been put forth against such entry and two, including financial inclusion, in favour.
It is a sign of the times that one of the arguments raised against entry of industrial houses echoes a very old concern about industrial policy in India going back to the early years of planning, namely, the fear of "concentration of economic power".
It is a concept that was all but forgotten in policy literature in recent years but seems to have resurfaced in the current context of the manifest links between business and politics.
Such larger issues ought to be kept in mind while devising the criteria for entry of new banks in India.
(Disclosure: Kotak Mahindra Bank is a significant stakeholder in Business Standard)
