Harsh Vardhan: More transparent bank licensing | Business Standard Column

Harsh Vardhan: More transparent bank licensing | Business Standard Column

My VIEW:

This is a well-argued article which calls for having more transparency
in issue of new bank licenses by RBI. The central bank burdened with the dual
roles of regulation and supervision of the financial sector, somewhere on the
way, neglected a responsibility which it was performing excellently till late
1980’s. That is the one relating to institution-building and ensuring
geographical spread of bank branch network in rural and semi-urban areas and controlling
the concentration of commercial bank business in urban and metropolitan areas.
The sudden awakening and expression of intention to issue new bank licences
early during the current decade did not reveal what approach RBI would be
following  in  allowing new banks. Some method in madness was
factored in once the new Governor settled down at Mint Road. Now, the unsaid
policy seems to be to allow the existing medium sized and big banks to
consolidate and grow, bring as many organisations which are doing ‘banking’
into mainstream banking business and make them gradually follow the discipline
needed in the banking business and allow new players whre ther is a ‘gap in outreach’.
Now, read the following two paragraphs in the article:
“Contrast this with the process adapted by other financial services
regulators - Irdai for licensing insurance companies and Sebi for licensing asset management companies.
Licences are issued "on tap". There are clearly laid down guidelines.
Once an application is received, there is extensive exchange of information
between applicants, at the end of which the applicants get the licence or are
rejected for failing to comply with specific requirements. This makes the whole
process far more predictable for the applicants.



In
addition to informing the applicants and making the process more predictable,
disclosures would also provide the regulator an opportunity to share more
broadly its thinking on such issues which will also be useful for the banking
sector. The number of licences to be issued can provide insights into how the
RBI thinks the banking structure will evolve, while clarity on the notion of
"fit and proper" would help incumbent banks in improving governance.”


At this juncture, RBI may do well to take up a nation-wide study to find
out the unbanked/under-banked areas in the country and under-banked sectors  in the economy. The qualifications for
new applicants may have to take into account their preparedness to meet gaps
which the existing institutional system is unable to bridge. Banks are not
comparable with insurance companies or mutual funds.
M G Warrier

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