Corporates may get to float banks

The government is toying with the idea of allowing big corporate houses to enter the banking industry.

Although no final decision on this has been taken yet, sources said the government was discussing the issue with the Reserve Bank of India, and an announcement to this effect could be made in the Union Budget for 2004-05. An RBI spokesperson refused to comment on the development, citing confidentiality.

A welcome change

An announcement to this effect could be made in the Union Budget for 2004-2005 Tatas, Birlas and Reliance had earlier applied for banking licences, but their proposals were not considered as the Centre was against the idea of big houses entering banking In February this year, the RBI issued a banking licence to Kotak Mahindra Finance Ltd, clearing the decks for the birth of a new private sector bank after a gap of seven-and-a-half years

While issuing the guidelines for new banks in January last year, the RBI had disallowed large industrial houses from promoting banks, though companies "connected with large houses" were permitted to hold up to 10 per cent of the equity of new banks. "Now, there could be a reversal of the policy," sources pointed out.

While formulating the licensing norms for new banks, the RBI was reportedly in favour of corporate houses entering the banking industry.

However, the finance ministry shot down the proposal. "Now, there seems to be a rethink on this sensitive issue. However, nothing has yet been finalised," sources said.

If the ministry changes its stand, the decks will be cleared for big business houses like the Tatas, the Birlas and Reliance to float banks.

All three had earlier applied for banking licences but their proposals were not considered as the Centre was against the idea of big houses entering banking.

In February this year, the RBI issued a banking licence to Kotak Mahindra Finance Ltd (KMFL), clearing the decks for the birth of a new private sector bank after a gap of seven-and-a-half years.

Last year, the central bank granted approval in principle to KMFL and three Indian finance professionals who teamed up with Rabo India to set up a commercial bank. The promoters of the proposed second bank have sought an extension of the deadline for seeking a licence.

The approvals were based on the recommendations of a committee chaired by former Reserve Bank of India Governor I G Patel.

At the time of issuing licences in principle to the two banks, the RBI had said it would consider inviting fresh applications for new private banks three years later, after reviewing the working of the new banks.

While giving approval to the two new banks, it raised the minimum paid-up capital requirement from Rs 100 crore (Rs 1 billion) to Rs 200 crore (Rs 2 billion), attaching a rider that this would be raised to Rs 300 crore (Rs 3 billion) within three years of operations.

It fixed the minimum capital-adequacy ratio at 10 per cent for these banks on a continuous basis from the commencement of operations.

When it released its licensing guidelines, the central bank said at best it would clear two to three of the best proposals over the next three years.

Even though it barred large industrial houses from floating banks, it said non-bank financial companies with an "impeccable track record" would be given licences. KMFL and Rabo were the only applications among almost a dozen licence seekers that met this criterion.