Banking licences: Is the RBI being too conservative

Is the Reserve Bank of India ( RBI) seeing all the leaves, branches, fallen twigs, root system, annual rings, Cambrian structure, etc, of the trees, while missing the wood altogether, in the matter of issuing new banking licences? The latest clarifications from the central bank on its guidelines issued earlier this year would suggest it is. This is unfortunate. India is a sadly underbanked country, whose citizens are, for the most part, left to the tender mercies of shadow-banking operators, thanks to the formal banking sector’s failure to give them access. India needs more banks, new kinds of banking, particularly mobile banking — which is ideally placed to take advantage of the electronic infrastructure being put in place by the Unique Identity project — and better regulation. To achieve this, we need new organisational forms: for example, a joint venture between a well-functioning state-owned bank and a telecom operator. The new guidelines are blind to such things.

The RBI is entirely right to not compromise on integrity requirements. A promoter group will be assessed for the entirety of its operations, not just of a particular company through which a banking licence is being sought. However, what sense does it make to not phase in the requirements on mandatorily holding government bonds (SLR) and parking cash with the RBI? The new licensees would suck up from the market liquidity meant for productive investment, to splurge on government bonds. As new banks race to meet their SLR target, they would bid up the price of government bonds, creating an artificial pressure on interest rates and an equally artificial boost to the value of bank books and the marked-to-market value of gilts held on them. To what end, RBI?

The non-operative financial holding company route to bank ownership is fine. But its prescribed ownership structure rules out joint ventures and conflicts with an insurance company seeking a licence. We need prudence. But that cannot be allowed to become an excuse for inertia. Indians deserve good banking, all of them.