RBI for stringent entry norms for new banks, 4-tier structure

The Reserve Bank Tuesday pitched for "stringent" entry norms for new players while suggesting four- tier structure for the domestic banking industry.

Mumbai: The Reserve Bank Tuesday pitched for "stringent" entry norms for new players while suggesting four- tier structure for the domestic banking industry.

"It is important that the entry norms should be stringent so as to encourage entry by only well-qualified entities in order to improve the quality of the banking system and promote competition," the discussion paper titled - Banking Structure in India - The Way Forward - said.

The discussion paper is released at a time when the central bank is sifting through 26 applications seeking an entry into the fray.

In the proposed four-tier system, the Reserve Bank has proposed a top tier consisting of 3-4 large banks with presence both in the country and outside, along with foreign bank branches.

The tier two will consist of mid-sized banks with economy wide reach and will be followed by a category devoted to old sector private banks, regional rural banks and multi state cooperative banks, the RBI said.

The final tier will consist of privately owned local banks and cooperative banks, it said.

Interestingly, on consolidation the RBI stressed the need to take a "measured approach" based on synergies and insisted on not making it compulsory.

"It has to be borne in mind that while consolidation of commercial banks with established synergies and on the basis of voluntary initiatives is welcome, it cannot be imposed on banks. A measured approach is to be made both on consolidation and global presence even if attaining global size is not imminent," it said.

It said "differentiated licensing" for infrastructure financing, wholesale banking and retail banking is a "desirable step" and there is also a need to promote investment banking system.

RBI said the discussion paper has been necessitated given the changing needs of the increasingly globalising economy, providing specialised services, deepening financial inclusion.

The central bank had announced it will be floating this paper at its annual monetary policy announcement and added that committees, including one headed by incoming Governor Raghuram Rajan and the Narasimham Committee had talked of explicit policy on the same.

The new bank guidelines issued in February this year also made a mention of the need for having an explicit policy on banking structure in the country.

"The overall thrust of the reorientation is to impart dynamism and flexibility to the evolving banking structure, while ensuring that the structure remains resilient and promotes financial stability," the discussion paper said.

At present, India follows a universal banking model wherein in the absence of explicit mandates banks operate as per their own requirements and visions.

There is a need for enhancing competition, financing higher growth, providing specialised services and furthering financial inclusion, the RBI said.

Other proposals floated in the paper include a reiteration on the importance of taking the subsidiary route for foreign banks' operation in the country.

On the Government ownership of the public sector banks, it said: "Going forward, there is a better pay-off in enabling public sector banks to improve their performance while promoting private sector banks."

In order to reduce the fiscal burden because of the recapitalisation needs of the state-run banks, it said proposals like issuing non-voting equity shares or diluting stakes can be considered.

It also noted the need for converting select urban cooperative banks into commercial banks so that they can get more avenues of raising capital and take banking to areas with poor outreach, the discussion paper said.