There is no harm in allowing fundamentally strong business houses to enter the banking space. Majority of the population in India is still unbanked so that offers ample scope for new banks. So after proper due diligence RBI should allow new entrants in the banking sector.
yes it did cause a lot of issues in the sector. But then if you have industrial houses likes TATA and Reliance and M&M then there should not be problems. Corporate governance wont be an issue with these companies. So it would actually help to improve the financial sector of our country.
Now say..new guidelines allow Industrial houses in the banking sector..
The concerned issues can be :
1. The history of 17 years since 1993 has been that banks promoted by individuals have either failed or merged with other banks...(iota of doubt in RBI's mind)
2.As RBI at the moment is concerned about the financial inclusion of Rural India into Banking..will the purpose be fortefied after taking this step?
3.Will not the promoter of Bank will use it more for his/her own business benefits by issuing loans and debt etc to owned Business house..?
As a solution If say I being governor of RBI allow Industrial houses to enter on one condition that they initially will have to open in rural areas...and being judged on their performances will be given licenses across PAN india...will it get a good response from industry ??
Yes agreed most of the banks promoted by individuals have failed or merged. So this time around RBI has to be very careful in opening up the sector. But at the same time they cant say that the new banks should be opened up only in the rural areas. None of the corporate houses are entering the sector for doing social service and they are answerable to their shareholders also.
Anyways according to the RBI guidelines none of the banks can issue loans more than 10% of their capital to one single group so this problem can be curbed to a major extent by actually reducing this percentage further to the new banks.
Also to ensure banks reach to the rural masses, RBI while giving out licenses to open branches should ensure that a certain portion of the branches are opened in rural areas. Like in the case of aviation where the cities are divided into various categories and each airline has to necessarily fly a certain portion of their flights per month to each category routes. Something like this could be adopted in banking sector as well to reach out to the masses
RBI has also mooted that Companies planning to set up a bank may be allowed to acquire Regional Rural Banks as an intermediate step before they get a full-fledged licence. So RBI wants to ensure that financial institutions reach out to the rural areas and also only serious players enter the space
To become a developed country, financial inclusion is must. Industrial houses setting up bank is welcome move but there has to be adequate checks so that they don't flout any rules. With SLR, CRR and basel 2 norms along with mandatory branches in rural areas, it can be a fantastic idea for these houses to set up banks.