RBI clarifications can be interpreted subjectively: Parekh

Sandeep Parekh of Finsec Law Advisors welcomed the decision of the Reserve Bank of India (RBI) to extend the time for licensees to implement the license in 18 months. However, he added that there are going to be subjective interpretations from the clarifications that were issued by the banking regulator.

“Given that it is not going to be an unlimited number of licenses, clearly there have to be a sliding scale of what the RBI thinks are good entities” Parekh told CNBC-TV18. Speaking on RBI’s decision to examine overall financial soundness of an applicant, he said that it was a good step as one wants people with good moral purpose in the banking sector. He said that the non-banking financial companies (NBFCs) would have to undergo some restructuring to keep up with the norm of transferring all financial service businesses to new companies for a license. Also read: RBI releases clarifications to the queries on the licensing of new banks in pvt sector Below is the edited transcript of his interview to CNBC-TV18. Q: This is a very large document - 164 pages, 443 questions answered. Basically, they have given more time for licensees to implement the license to 18 months. Per se that would be welcome you think? A: Yes. All the issues will really revolve around lot of soft and subjective aspects. There is going to be lot of scope for interpreting of the concept of ‘fit’ and ‘top’ for instance. It is very difficult to define things like that. Q: Do you think this is a major dampener that the Reserve Bank of India (RBI) says that when we look at financial soundness of an applicant, we will look at all their businesses so far and not just their financial business. Did you always expect that? Did it come as a shock? A: No, it is not at all a shock. I would have been shocked if it was the other way round because you want people with good moral purpose to be in the banking industry. I would be shocked if proper fit and proper purpose is just in the financial sector but not in all sectors. You can’t have ethics in one sector and lack of ethics in another sector. Q: The RBI has refrained from giving any qualitative or quantitative criteria. It has merely said that it will ‘apply qualitative and quantitative criteria’. Is this expected and does this open the Pandora’s Box? A: No it does not, which is what I mentioned two minutes back. The criteria cannot be boxed into a checklist. It involves a lot of subjectivity. Given that it is not going to be an unlimited number of licenses, clearly there have to be a sliding scale of what the RBI thinks are good entities. It is not something which it specified as a non-realist. Q: One of the key points is non-banking financial companies (NBFCs) must transfer all financial service businesses to new companies. Does that now mean that an NBFC cannot exist as an owned entity which is listed on the exchanges and there has to be restructuring which needs to undertaken by a current promoter company which holds an NBFC at this point? A: I am not very clear because I have not seen the document. However, it seems that they will need to do some level of restructuring.