The Reserve Bank of India has started a review of the new bank licensing norms.
Sources said the major criteria for review will be the minimum paid-up capital of the bank, nature of new entities to be allowed in the banking sector, promoters' contribution in the paid-up capital, nature of promoters and corporate governance norms in the current scenario.
RBI had released the guidelines for licensing new banks in the private sector way back in 1993 and thereafter reviewed it in 2001.While net worth of new banks is likely to be enhanced from Rs 300 crore (Rs 3 billion) at present, the corporate governance norms for promoters may be tightened further. According to sources, to start with, the RBI may allow entry of more private well-governed banks with higher capital adequacy and transparency norms, in line with the recommendation of the Raghuram Rajan committee on financial sector reforms.
While this model will be similar to the erstwhile local area banks, RBI will work out norms for enhancing the financial viability of such bodies.
The logic provided by the Rajan committee
for small private sector banks is that it will be an entry point for small entities in the banking system who could later grow into large banks. In the process, it will also enhance service quality of banks in general, by providing viable alternatives to the customers.
Besides, the report stated that failure of a few small banks will not have as much systemic risk as failure of a single large bank. While the RBI will relook existing norms for the conversion of a non-banking finance company into a bank, allowing a corporate house promoted NBFC into a bank may not be examined at present. Sources added that there are many large banks which need to be made more efficient before other large entities are to be allowed.
Meanwhile, RBI is also mulling over a possibility of relaxing norms for entry of agency banks of Indian banks operating overseas or banks with whom Indian banks have strong business connection overseas. While the review of the roadmap for expansion of foreign banks in India is at present not happening, this option forms part of the limited review.
Sources added that other country regulators have not been as accommodating in their bank licensing policies for Indian banks in their countries as RBI is in India.
The Reserve Bank of India has started a review of the new bank licensing norms.