RBI must be allowed to supercede bank boards: HDFC

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RBI must be allowed to supercede bank boards: HDFC

HDFC Chairman Deepak Parekh has welcomed Reserve Bank of India’s (RBI) much awaited discussion paper on new bank license. He says that that RBI’s move will open up banking sector to rural areas and fetch in whiff of fresh air in the sector. He adds that the discussion paper is very comprehensive.

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Excerpts from Reporter's Diary on CNBC-TV18 Watch the full show » ALSO READ See latest News about HDFC See previous management interviews See what other Experts & Brokerages are saying about HDFC

HDFC Chairman Deepak Parekh has welcomed Reserve Bank of India's (RBI) much awaited discussion paper on new bank license.

In an interview to CNBC-TV18, he says that that RBI's move will open up banking sector to rural areas and fetch in whiff of fresh air in the sector. He adds that the discussion paper is very comprehensive.

However he is concerned that RBI will grant license to new banks only on annual basis.

"They will probably give more but on an annual basis a couple for two years or three years.I don't think more than 5 or 6 licenses will be given over a three year period. So it is not going to disrupt or impact or affect the existing banking operations or banks that are operating," he explains.

He also feels that the RBI must be empowered to supercede vulnerable bank boards before licences are given.

Here is a verbatim transcript of his comments. Also watch teh accomapnying video.

Q: First and foremost the Reserve Bank does not say why it has asked for fresh licenses, it merely says that the Finance Minister said it in the budget. Do you think there is a need at all for new licences?

A: We have a bank we don't need a new banking license policy. Many years have gone by where we have had no new banks set up. So its always a breath of fresh air to have new people coming in sector. The unbanked areas in India are so large. There is a huge amount of people who have no access to banks in rural India and we need some thrust in the rural areas.

Q: The reason why I asked you is that will mean a whole lot of competition, another 15 banks backed by probably Tata's, Birla's and whoever is huge competition for you?

A: I think the way the banking sector has opened up in the past and if you can draw a judgment from it, I don't think RBI is going to give 15 licenses on day one. They will probably give more but on an annual basis a couple for two years or three years. So I don't think more than 5 or 6 licenses will be given over a three year period. It is not going to disrupt or impact or affect the existing banking operations or banks that are operating.

The discussion paper is very comprehensive, but please remember its only a discussion paper, it is not a guideline of the RBI the guideline have not yet come out, It's a paper where they are asking comments from interested party's, from non interested party's, from economists, from anyone and then they will make up their mind what should be the real guidelines or rules under which new licenses will be given and as you say the way it begins.

It looks very clearly that RBI is not keen to have new banks at this stage but they were asked because the finance minister has made his comment in the budget that the discussion paper is out.

Q: Let me take the issue that they have put out, first the start up Capital, how much should it be? When you all started 1994 - 1995 they asked you all to bring Rs 300 crore and now they say that should I begin at Rs 300-500 crore or should I begin at a high Rs 1000 crore. Is even thousand crore high?

A: When we got the licence it was Rs 100 crore, it was in the '90s. But it was Rs 100 crore mandatory. We came up with Rs 200 crore. We started the bank with Rs 200 crore.

But in today's environment minimum Rs 500 crore is absolutely necessary and going up to Rs thousand crore in a short period of time, in 4 to 5 years as the bank grows. So I think Rs 500 crore is minimum. I would have preferred the minimum to be Rs 1000 crore. But the danger is the higher the capital you put then the entry point becomes fewer and fewer. Very few people will be able to bring that kind of money.

So considering that it's a good via media that the Reserve Bank in the discussion paper has come out with a minimum Rs 500 crore and going up to Rs 1000 crore over a period of time.

Q: The next issue to dwell on is how much should the promoter be allowed to hold? Now the two or three options they give is allow to retain the present one, start at 40%, bring it down to 10%. The other one is don't bring it down to 10%, even a maximum of 20% can be retained down by the promoter. And the third one is start at 10% for the simple reason that some of the licence they gave, the promoters never brought it down to 10% and the option of just canceling a licence doesn't work because too many interests are involved. So where would you stand on that? Would you say 10% is a good idea?

A: I think 40% should be there. There must be some financial stake of the party that is promoting a bank, that is getting a new license. So initially 40% must be mandatory and then friends and families and others, 10% can be brought by individual companies or entities. So I think to start with 40% is minimum.

Even we were given 40% but because we had Natwest as our partner they reduced our stake to 25% and Natwest to 15%. So when we started 15 years ago the same 40% was there. But there was no condition at that time that we had to bring it down. That came subsequently.

Q: The discomfort perhaps with an entity like HDFC doesn't arise because HDFC itself is widely held. But the problem with this 40% is how do you ensure that they bring it down to 10% when it is big. And when you have that kind of a control in the bank the chances of intra group lending and the other kind of favoritism is there and most importantly under the current law on the board you can have only 10%, you are capped. So what you are doing is you are doing devious ways, in phony names and the entire system is hand in glove with that actually legitimizing what is patently unfair?

A: The issue really is that the desirability of businesses and industrial houses to apply for licences. If you look at the other end of the spectrum, our experience in the past has not been good when we have given individuals and professional licences.

So we have to have a change in our mindset because not one, not two but three or four times we have given to, in the past to professionals, to individuals where the banks have collapsed or the promoter has sold it and made a huge amount of money in a short period of time or run the bank to the ground and then sold it for a package.

So our experience has not been good in the past for giving it to individuals and professionals. So I guess the Reserve Bank is trying to see that if an NBFC is there or a diversified group is there, industrial group, there is no harm in trying out a new licence seeker.