FM asks RBI to start issuing new bank licences

Finance Minister P Chidambaram on Saturday made it clear to RBI that it has the powers to issue new bank licences and expressed the hope it will take the process forward "appreciating" government's position.

Updated: Nov 24, 2012, 14:40 PM IST

Pune: Finance Minister P Chidambaram on Saturday made it clear to RBI that it has the powers to issue new bank licences and expressed the hope it will take the process forward "appreciating" government's position.

"Let me emphasise that the three powers that RBI want are already there with the RBI. It is already there in the regulation; it is there in the powers to grant the banking licences.

"I am sure the RBI acknowledges and appreciates the well-considered position of the Government and will take the process forward," he told reporters after inaugurating the two -day annual national banking summit (Bancon 2012) here.

The Finance Minister said amendments to the Act are simply to formalise powers that the Central bank is seeking and bring them together into the legislation.

Last week, after Chidambaram asked the regulator to start the process of issuing the much-delayed new banking licences, on November 16, RBI Governor D Subbarao had said it would be not possible without fulfilling the enabling conditions.

Asked whether RBI has formally responded to the Ministry that new licences could not be issued without the Bill being passed, Chidambaram said, "well, I don't know if a formal reply has been received to the letter that we sent 10 days ago. I don't know what their formal position is."

Asked whether he is confident of getting the Act passed in the ongoing winter session of Parliament, the Minister replied in the affirmative.

"I am pretty confident that the Banking Regulation Act will be passed as early as possible," Chidambaram said.

"Even if the RBI picks up the thread and resumes the process that was started about a year ago of finalising the guidelines and issuing the first licence, that is going to take six to eight months and the occasion to invoke these extraordinary powers will not come the next day," he said.

"The occasion to invoke these extraordinary powers will come only when that bank does something wrong. And that is not going to happen one day after the licence is granted.

"Therefore, by the time the occasion arises, the powers will be there in the Banking Regulation Act. So as stated by the then Finance Minister's Budget speech, we must take the process of finalising the guidelines and receiving applications for new bank licences as early as possible," Chidambaram said.

The RBI is seeking powers to supersede the board of an erring bank, to authorise acquisition of shares beyond 5 percent in a bank holding company, and an exit policy in case of irregularities.

On November 15, Chidambaram said he had asked RBI to finalise the guidelines for new licences and start accepting applications for the same pending passage of the Banking Regulations Bill.

The last time the RBI allowed new private banks was in 2002 prior to which it allowed new players in 1991-92.

The RBI issued the final guidelines for new banks in August 2011, including those floated by corporates, but is waiting for the necessary legal powers before it proceeds further. The bank licences were initially slated to be issued way bank in 2008-09.

However, the Finance Ministry wants RBI to speed up the process, under provisions of the Companies Act, without waiting for amendments to the existing banking laws, in its effort to create a positive sentiment among investors and the industry.

The amendments to the Banking Regulations Act will invest RBI with supervisory powers over private companies that would enter the banking sector.

On October 30, at the credit policy announcement also, Subbarao had ruled out any short cuts when it came to issuing new bank licences.

"We believed, we believe and we still believe that we need these powers to move forward," he had said, adding "an amendment to the Act is pending for giving us the necessary powers, authority and dispensation to deal with corporates entering the banking sector."

As per the RBI's draft norms released in August 2011, private sector entities or groups owned and controlled by domestic promoters, with diversified ownership, sound credentials and integrity, and having successful track record of at least 10 years, would be eligible to promote banks.

The norms have pegged the minimum capital required for promoting a bank at Rs 500 crore and restricted foreign shareholding at 49 percent for the first five years of operation.