Bank licences for companies will make sector competitive: RBI

To allay concerns over issuing new bank licences to companies, Reserve Bank of India Governor D Subbarao said on Friday corporates will bring in large amounts of capital and make the sector more competitive.

"The main reason we have allowed corporates is to leverage their proven entrepreneurial talent and management expertise," Subbarao said at a function organised by the Institute for Development & Research in Banking Technology in Hyderabad.

"Indian corporates have been innovative in penetrating into the hinterland and the expectation is that the same spirit of enterprise will lead to innovation of new business models for financial inclusion," he said.

Tata Sons, India's biggest business group, and firms controlled by billionaires Anil Ambani and Kumar Mangalam Birla are among the 26 companies that have applied for licences to open banks.

There has been concern that corporates could misuse large public deposits and advance loans to their own units, customers and suppliers.

“Large corporates will also bring vast pools of capital that will go into strengthening financial intermediation and making our banking sector more competitive," the Governor said.

"They have also been allowed in other segments of regulated financial activities such as mutual funds, asset management and insurance."

The RBI issued guidelines for licensing of new banks on February 22 and came out with clarifications in the first week of June. Unlike previous rounds, this time the regulator decided to make corporates eligible for bank licences.

"The balance of arguments for and against corporates in the banking sector has changed," Subbarao said.

"The Reserve Bank took a pragmatic view and determined that allowing corporates into the banking sector would be net positive."

Image: D Subbarao