An RBI discussion paper has highlighted the merit in liberalising the entry process for new banks through continuous authorisations as opposed to the existing system of periodical review.
Stringent entry norms, especially regarding capital and related buffers, to be prescribed by the regulator will ensure that only eligible and deserving entities will be able to enter the fray, the paper on ‘Banking structure in India— the way forward’ said.
More aspirants
‘Stop and go’ or ‘block’ licensing policy inevitably leads to a frenzied response from large number of competing aspirants (for example, the RBI received applications from 26 entities to set up banks in the private sector), whenever the licensing process is opened up in an ad hoc manner.
The paper said, the block licensing policy also promotes rent seeking, whereby business entities use their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation.
The suggestion of ‘continuous authorisations’ to open new banks in India needs to be viewed from the perspective that it is not entirely new.
Such continuous authorisations are permitted already in the case of foreign banks, which want to enter the Indian banking system but not the domestic banks.
A licencing policy may be announced to have a shelf life of, say, three to five years, the paper said.
“This (licencing policy) would ensure that the (new bank licence) aspirants know for certain the policy regime under which they have to set up a bank and the regulator will also be able to periodically modulate the licensing policy based on the needs of the economy and the banking sector,” the central bank.
Stringent norms
However, it is important that the entry norms should be stringent. Of particular importance for preserving appropriate incentives are standards governing the entry of financial firms together with bankruptcy codes and other provisions relating to exit.
Authorities should seek to facilitate and encourage entry by well-qualified entities in order to improve the quality of the banking system and promote competition.