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RBI stumbles

AFTER NODDING IN favour of private sector entry into banking, the Reserve Bank of India has run into a logical snafu in barring large industrial houses.

Other than big houses, none has the muscle to rustle up Rs 200 crore as initial paid-up capital, going up to Rs 300 crore in three years. The promoters' contribution in a new bank has to be a minimum 40 per cent and an NBFC can turn into a bank provided there is no stigma of a large industrial house, a carry-forward from the planning era. Denying licences to big houses could have carried conviction if the RBI had, over the years, nurtured a quality financial system. It has not happened and the central b ank realises that private hands can take better care of the economy. Yet, if the RBI has an unstated antipathy for large houses, it could be due to the large corporate NPAs that banks are saddled with. But the Centre and the State governments are equally culpable for using the banking system to finance favoured sections.

The RBI Guidelines insist on an arm's-length relationship between the promoter group and the bank. Good. But has the RBI enforced even a small-finger-length relationship between the Government and nationalised banks? Innumerable players are crowding the financial system, and adding on three more banks could tell on the strained RBI's supervisory ability. The central bank says it prefers promoters with expertise in financing priority areas, rural and agro-based industries. In 1993, the RBI granted licenc es to ten banks, of which at least two were big-ticket entrepreneurs, though this term is not clearly defined in the RBI lexicon. The new entrants, with a minimum paid-up capital of Rs 100 crore, have not gone beyond snatching a few personnel and account s from the nationalised banks. They have not reached the farm or services sector, where fresh business is awaiting funds. In a manner the RBI Guidelines only ensure status quo for the existing players with 80 per cent of the business in the hands of publ ic sector banks. The RBI could have pushed for big industrial houses picking up majority stakes in nationalised banks when government equity drops to 33 per cent. That looks the least cost and best option with New Delhi strapped for recap funds. The Gove rnment has to drum up over Rs 3,000 crore for Indian Bank, UCO and United Bank this year to keep them going. Or, the RBI could have placed on paper a policy for merging some of the nationalised banks under a holding company with corporates bidding for ma jority stake in the umbrella entity.

When banks fund NBFCs floated by top business houses, it is odd for the RBI to stop these entities from turning into banks. Sundaram Finance and Tata Finance have brand recalls probably better than most government-run bodies. Will the RBI Guidelines now stop Tata Finance from bidding for one of the private banks set up under the 1993 policy? One is not sure. If HDFC Bank can take over Times Bank, is it prudent to stop Tata Finance from snapping up, say, Centurion Bank? When New Delhi has allowed the Tat as and Reliance into insurance (a risky business), the RBI stance on new banks does look amiss.