Companies planning to seek bank licences under planned new norms may have to wait longer since statutes need to be amended to plug holes that could be exploited by them, said Reserve Bank of India Governor Duvvuri Subbarao.
"As we contemplate allowing corporates to promote banks, there is need for changes in statutes and regulations," Subbarao told a bankers' conference days before the release of new bank licensing norms. "If a corporate has an interest in a bank as a promoter or a shareholder, but has no position on the board, then there is no prohibition on the bank lending to the corporate. This opens up opportunities for self-dealing. Amendments are necessary before corporates can come into banks."
The central bank plans to issue an unspecified number of new bank licences, the first time since 2004. While one criterion to be eligible is the applicant's plan for financial inclusion, the government's mantra, there may be other strict conditions too. There is a debate on whether companies and conglomerates should be allowed to set up banks since funds could be misused. The RBI is open to allowing cash-rich companies, but with a lot of strings.
"Clearly, the issue of granting banking licences to corporates is on the Reserve Bank governor's mind," said Saurabh Tripathi, partner and director at The Boston Consulting Group.
"The RBI might either defer the issue or come up with a set of safeguards so that depositors' interests are protected," BCG's Tripathi said.
A major argument in favour of corporates entering the banking sector is that they bring capital and managerial experience. But the downside is a potential conflict of interest if corporates are given ready access to bank funds that could lead to self-dealing.
Even if regulations are tough, it may be difficult to prevent misuse unless the business house itself emphasises on high standards of corporate governance.
"To believe on this basis that good regulation can offset bad corporate governance will be patently wrong," said Subbarao. "Regulation can complement corporate governance, but cannot be a substitute for it."
Investors have been speculating that the Tata Group, Anil Dhirubhai Ambani Group, Mukesh Ambani's Reliance Industries and Indiabulls may be among a dozen interested in securing a bank licence. Others in the fray could be the Shriram Group - which runs the largest truck financing company, Religare Enterprises and Edelweiss that run financial services companies.
The board of directors of banks may be held accountable under new rules as they have a fiduciary duty to protect the depositors and ensure that risk is constantly monitored.
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