RBI must consider giving new bank licences on tap: Rangarajan

The RBI should consider giving new bank licences on tap, C. Rangarajan, Chairman to the Prime Minister’s Economic Advisory Council, has suggested.

This would mean a system wherein the Reserve Bank of India awards licenses throughout the year to those entities who fulfil specified criteria.

Currently, the RBI follows what is known as a ‘stop and go’ or a ‘block’ licensing policy for banks, where it periodically issues new banking licences.

The RBI is in the process of selecting candidates from the corporate sector for the award of new licences. India Inc has been lobbying for an ‘on tap’ bank licence policy, something which the RBI has so far resisted.

This appears to have got a powerful push with Rangarajan’s endorsement. He said India should consider a policy for ‘continuous authorisation’ of new bank licenses. He was speaking at a banking summit organised by Assocham on Monday.

Rangarajan said entry norms should be stringent and only well-qualified entities must be encouraged in order to improve the quality of the banking system and promote competition.

Rangarajan also felt that India should take a long-term view in deciding on how many new banks need to be licensed.

“Our decision on how many new banks to be licensed must be based on what the economy will need, not today but over the next several decades,” he said.

Rangarajan also pointed out that new banks take about two decades to reach a sizeable level.

“If the Indian banking system is to remain competitive over time, there should be no bar on the entry of new banks. A closed system can only become oligopolistic. The ‘threat’ of entry should not be eliminated,” he said.

srivats.kr@thehindu.co.in