Alteration of bank licence norms unfair: EY

Ashvin Parekh, senior advisor, EY says it is unfair on the government's part to change the rules after the whole process of applying for a banking licence is over.

The Standing Committee on Friday recommended that industry and banking be kept separate, as it is not sure whether the safeguards put in place by the RBI including the fit and proper criteria, and group exposure norms would be effective enough to prevent banks promoted by industrial houses from cozying up to their industrial owners.
Speaking to CNBC-TV18, Parekh says the banking sector is in dire need of capital to fuel the economy. "If the banking sector has to fuel the economy which could grow at 6.5-7-7.5 percent, the amount of money required in banking sector by way of capital is of the order of about USD 30-32 billion in the span of next five years," says Parekh who believes that capital of this size can be brought in only through corporates. Below is the edited transcript of Parekh's interview to CNBC-TV18. Q: Is the standing commission’s views on providing the new banking licence, are they a legitimate concern?
A: It is a concern to the extent that for three years now we have debated this aspect. The whole argument came up when the first time the whole process began. Then finance minister Pranab Mukherjee made a reference of new licences in the Budget speech about four years ago, three years ago and three and half years now.
After that the regulator came out with the first discussion paper. We had comments on that and there was a second discussion paper we had comments on that too. The regulator studied all that then he came out with guidelines once again there were comments on that. During all this process, we accepted the fact that corporates are the ones who will be able to bring in capital which is essential in the banking sector.
If the banking sector has to fuel the economy which could grow at 6.5-7-7.5 percent, the amount of money required in banking sector by way of capital is of the order of about USD 30-32 billion in the span of next five years.
Even Reserve Bank of India (RBI) has confirmed this by way of a separate paper. If we need that kind of capital, corporates are the ones who are in a position to bring this.
By way of policy I certainly see there is certain amount of disconnect between the government and the regulator. The government did believe at some point in time that some of this capital could come from foreign investors as well.
RBI continues to believe that for the banking sector it makes larger sense to mobilise this capital from domestic market rather than from foreign investors and to that extent the whole guidelines were issued in keeping with that understanding which the government, ministry of finance and the regulator came out with.
Opening of that now after three years, three and half years of debate to my mind makes the whole thing unnecessarily. I think it is a little controversial. Q: The biggest risk of industrial houses entering into banking is inter promoter lending – how much of a risk is that and how can there be checks and balances?
A: Inter promoter group lending is something which I suppose is something which the regulator will have to be very careful about. There is no denying that fact. In fact, the minute one opens up the banking licences to corporate houses, there is the possibility of that happening. Otherwise, it will all depend on the kind of people who will get into the banking business but there is a possibility that the promoter kind of lending could become a major issue later on.
This is one of the reasons why perhaps the nationalisation of banking had to take place some 35- 40 years ago. So, it is a reality but once again, I am very confident that that is something that the regulator has to worry about.
Let’s not forget the kind of control the promoters have. The guidelines talk about diluting the promoter’s interest in a span of about 3 to about 10 years, from 15 percent to almost a negligible amount. To that extent these fears are valid but they have been addressed. Q: The other point which has been spoken about is the increasing the minimum capital requirements to Rs 1,000 crore versus Rs 500 crore – if in case that does come through will we see many of the applicants just drop out since their plans were worked on the basis of Rs 500 crore?
A: Based on the guidelines people have drawn their applications, Most significantly, they have drawn their business plans in keeping with that. If one really asked me, since I have worked very closely with so many people who have applied, I can tell that there is no single application which is going to use up about Rs 1000 crore of capital in the first year itself.
One is not going to garner the kind of deposits which is essential for requiring Rs 1000 crore kind of capital, one will need it perhaps two years or three years, why would one start with Rs 1000 crore, is the first question that I would like to ask.
The second question that comes up is- well the process has begun, people have made their applications, now one can’t change the rules, one can’t now say that only those out of 26 people who have applied who is starting off with a capital of Rs 1000 crore should be admitted. This would really take the whole process back in that case.