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Who Is Fit And Who Is Unfit - RBI Is Watching

Posted in Finance Articles, Total Reads: 2938 , Published on May 07, 2012

The Union Finance Minister, in his budget speech for the year 2010-11 had announced that “The Indian banking system has emerged unscathed from the crisis. We need to ensure that the banking system grows in size and sophistication to meet the needs of a modern economy. In this context, I am happy to inform the Honourable Members that the RBI is considering giving some additional banking licences to private sector players. Non Banking Financial Companies could also be considered, if they meet the RBI’s eligibility criteria.”

So now, the question that RBI faces is, who is fit and who is unfit, to become the new banker of India? For this, they have come up with the new banking license policy rules & guidelines. Lets have a close look at some of the important considerations for a new banker.

A low level of financial literacy, huge potential of banking industry, growing India Inc., urbanization and increasing population are the driving factors which are forcing as well as providing an opportunity for Indian corporates to dream for a bank.

The agenda this time while formulating new license policies was of financial inclusion. For this, they have laid down a restriction of opening at least 25% of the total branches in unbanked rural areas. This was very much needed as our rural sector is highly deprived of these banking services. Low financial literacy constricts them from using their funds in a proper manner. For banks these unbanked areas are the opportunity, the need is already there, what is required is a proper business model, picking up the right technology, managing assets side risk and there by making business model a huge success.

Opportunity, a huge chunk of it, also lies with the SME sector, which has been growing on an extensively high rate from the past decade. Here is the untapped potential market which needs to be catered.

Now, let’s analyze some pros and cons of the companies who are vying for the banking license.




Reliance Ind. Ltd.

Strong capital and cash reserves

A case pending on insider trading

L & T Finance

Clean record

New entrant in financial services, no prior experience.


Strong capital base

2G cases going on

Birla Finance

Strong capital base

Parallel real estate business (a risky business)


Strong institution and Government.

‘Bribe for loan’ case

Edelweiss Capital

Clean record and wide network

Capital market business exposure

India Bulls

Huge capital base

Demat scam


Government backing

Restricted to power sector only


Strong capital base.

Brokerage business


Strong presence in rural areas


The above table gives a brief analysis of the corporates who are eyeing the new banking license, but again the main worries for RBI are –

  • Will public money be safe in these banks?
  • How will it assure that a new Global Trust Bank does not emerges again?
  • Will these banks ensure the greater good of economy or the main motive will be to add to the personal profits?

Learning from mistakes and the way ahead

RBI was very keen in formulating the new guidelines keeping in view the loopholes that lead to failure of few banks in the past. Talking about Global Trust Bank, the serious mistake that RBI did then was leaving unchecked the huge exposure of the bank to secondary equity market. Consequently, GTB was in deep trouble when the Ketan Parekh Scam hit the stock market. Hence, this time RBI has put a restriction of 10 % of the paid up capital and reserves (of the bank) on exposure to secondary market.

Minimum initial paid up capital required has been increased to Rs. 500 crores which will restrict the entry of non serious investors in this banking industry.

Groups with diversified ownership, sound credentials, integrity, and a successful track record for at least 10 years shall be eligible to promote banks. The RBI may seek feedback on applicants from other regulators and agencies like Income Tax, CBI, Enforcement Directorate, etc. Not just of the companies, but the track record of their directors and the promoters will also be taken into consideration for the issuance of the license. These clauses rule out a first-generation entrepreneur and the companies with bad track records, hence reducing the chances of default.

Bank within the two years of operations has to get listed on stock exchanges to increase transparency in their operations. Also prior approval of RBI will be required every time the company wants to increase its paid up capital. This intervention of RBI in expansion in the business will facilitate detection of flaws, if any, at the earliest stage.

Framing the rules and policies do not ensure that the system has become error proof. The main challenge that lies ahead with the RBI is the implementation and adherence to these documented rules and policies and controlling wisely, the deviation from these rules.

Thus, for both the corporates and the central bank, the task ahead is full of challenges and opportunities. Meanwhile, we, the aam adami, will have to wait and see how the event take turns.

The article has been authored by Prateek Jain from Fore school of management.

Image: Idea go / FreeDigitalPhotos.net

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