Continuous authorisation of new banks, allowing niche banks through differentiated licensing and dilution of Government holding in public sector banks are among the issues that are being examined by the central bank for ushering in a revised banking structure in the country.
The above mentioned issues were flagged by the Reserve Bank of India in its discussion paper on ‘Banking Structure in India – The Way Forward.’
The paper observed that the extant ‘block’ or ‘ad hoc’ bank licensing policy should make way for ‘continuous authorisation’ of new banks as the latter would stimulate and foster competition.
“A proposal to liberalise the bank licensing policy can well pave the way for the next round of reforms in the banking sector.
“The objectives of financial inclusion and broadening the geographical reach of banking can be achieved only when the entry process is not a restricted one,” said the paper.
Universal banks
Pointing out that universal banking model (whereby banks provide a wide variety of financial services, including commercial and investment services) remains the dominant and preferred model in most of the post-crisis world, the RBI paper suggested that this model should evolve in India under the financial holding company (FHC) structure.
The FHC structure helps in removing capital constraints and facilitating expansion in other financial services. Since under the FHC, the subsidiaries will not be directly held by the bank, the responsibility to infuse capital in the subsidiaries would rest with the holding company. Additionally, in a changing economic environment, the paper said there is a need for allowing banks for niche segments — infrastructure, wholesale and retail — for taking care of specialised banking needs through differentiated licensing. Further, there is also a need to promote investment banks/ investment banking activities.
As against the existing banking structure, comprising commercial banks and co-operative banks, the RBI paper said, the banking system should be re-oriented along four lines.
The four lines are — international banking (three or four very large banks and foreign banks in India); national banks (public sector banks, new private sector banks, subsidiaries of foreign banks, and specialised banks); regional banks (old private sector banks, regional rural banks, and multi-state urban co-operative banks); and local banks (local area banks, single state urban co-operative banks and district central co-operative banks).
Govt ownership
The paper pointed out that on one hand, the predominance of government owned banks in India has contributed to financial stability, on the other, meeting their growing capital needs casts a very heavy burden on the Government.
As regards the reduction in fiscal burden on account of recapitalisation of the public sector banks (PSBs), it can be achieved by considering issue of non-voting equity shares or differential voting equity shares.
The Government could also consider diluting its stake below 51 per cent in conjunction with certain protective rights to the Government by amending the statutes governing the PSBs. Another alternative would be to move to a Financial Holding Company structure.