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Q. Complex rules for on-tap banking licences: Discuss how complex structure of rules laid by RBI for on-tap banking licences have severely restrict level playing field.
Aug 04, 2016 Related to : GS Paper-3

Ans :

Introduction-

To insert fresh blood in Indian banking sector RBI has decided to issue universal banking licences for on-tap. On-tap licences will allow interested players to throw their hats into the ring when they see lucrative gaps in the market, which was impossible under the old system of stop-and-go licensing.

Issue-

  • The complex structure of rules laid by RBI to issue licences for potential applicants seem to severely restrict the playing field.
  • High-entry barriers based mainly on ownership may keep promising players out of the ring.
  • This militates against the larger policy objective of ushering in competition.

How?

  • The guidelines allow individuals with ten years’ experience in finance, private sector entities with minimum assets of ₹5,000 crore, and domestic NBFCs with a 10-year track record to apply for licences, provided they meet RBI’s “fit and proper” criteria.
  • For example, corporate groups cannot apply if non-financial businesses make up over 40% of their gross assets or income. This may effectively keep out conglomerates such as Aditya Birla, the Tatas and Reliance — some of whom had applied in previous rounds.
  • Similarly, even NBFCs hailing from large corporate groups need to meet this norm. Firms such as Bajaj Finserv and M&M Financial Services may face hurdles here, as non-financial businesses may make up over 40% of their parent group’s turnover/assets.
  • Also NBFCs who make it past these hurdles have other onerous rules to comply with. They will need to float the bank through a “non-operative financial holding company”, house all their banking-related activities in this entity, and undertake not to start any other financial business within three years.
  • Entrepreneurial banks promoted by individuals have a lighter set of rules to comply with. But even they will have to ensure ā minimum networth of ₹500 crore, 25% rural branches, and promoter holding of 40 per cent for the new bank.

Suggestions-

  • The banking system in India presently in need of new ideas. Similarly there is need of new players who can be more effective in delivering inclusion.
  • There is need of opening up banking to more deep-pocketed private players, while addressing concerns about risky lending through stringent supervision.

Conclusion-

RBI’s decision to issue on-tap banking licences is welcome move, considering the status of current Indian banking system. But these conditions based on ownership severely restricts level playing field. There in need of new and effective players in Indian banking system to serve various purpose, hence RBI needs to amend the rules to permit other effective players to get in.


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