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Budget could permit new private banks

New Delhi: India is considering allowing new private sector banks, including by industrial houses, and a roadmap for the same could be announced in the annual Union Budget to be presented later this month.

While the formal and final guidelines would be announced by RBI on who should be allowed to set up new banks and what should be the terms and conditions for them, a roadmap on the subject could be announced in the Budget speech on February 28 by Finance Minister Pranab Mukherjee, sources added.

In his Budget speech last year, Mukherjee had said that there was a need for extending the geographic coverage of banks and improving access to banking services.

The Reserve Bank of India (RBI) is close to finalising the guidelines for entry of new banks in the private sector, based on its consultations with the government and various stakeholders, as also the feedback to its August 2010 discussion paper on the issue, sources in the know said.

Among the various options, the RBI is considering grant of licence for small banks for initial few years, which could be upgraded to full-fledged banking licences after the central bank is satisfied with their performance and fulfillment of certain criteria, sources said.

The guidelines would dwell upon issues like minimum capital for new banks and promoters contribution, minimum and maximum caps on on holding of promoters and others, foreign shareholding, business model for the new banks and whether industrial houses, NBFC (non-banking financial companies) could be allowed to run banks.

Among others, a number of corporate houses, including Anil Ambani-led Reliance group, the Aditya Birla group and the Religare group, have expressed interest in obtaining banking licences. A number of NBFCs and micro-finance institutions are also said to be interested in the banking business.

Mukherjee had said in his Budget speech in February 2010 that RBI was considering giving some additional banking licences to private sector players and NBFCs could also be considered, if they meet the RBI`s eligibility criteria.

Pursuant to this, RBI in its Annual Policy Statement in April 2010 said that it would prepare a discussion paper marshalling the international practices, the Indian experience as well as the extant ownership and governance guidelines for grant of new private sector banking licences.

The discussion paper put out for feedback on August 11, 2010 and thereafter the central bank also held discussions with various stakeholders from the industry, banks, NBFCs and MFIs, consultants and other entities.

Later in December 2010, the RBI made public the gist of comments received on its discussion paper and said that "the range of comments received has been very wide and does not indicate consensus on any of the issues."

RBI has said the new licences were required since vast segments of population, especially underprivileged, have still no access to banking services.

Currently, India has 27 public sector banks, seven new private sector banks, 15 old private sector banks, 31 foreign banks, 86 regional rural banks, four local area banks, 1,721 urban cooperative banks, 31 state cooperative banks, and 371 district central co-operative banks.

The last time private sector entities were granted licence to commence banking operations in India was YES Bank in 2004 and Kotak Mahindra Bank a year earlier in 2003.

The conditions being mulled over to put on industrial houses include a diversified and transparent shareholding structure, financial sector presence of minimum 10 years, their track record of dealing with public deposits and their existing retail customer base.

Besides, the industrial houses could also be asked to ring-fence their various operations to safeguard their banking operations from risks associated with other businesses.

Besides, RBI is also mulling granting only retail banking license or a small bank licence for first five years as part of a dual-licensing regime.

At the same time, RBI could also put strict penalties for violations of its various guidelines.

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