But banks, who fear that this could lead to a lot of connected lending, however, were not in favour of the proposal due to the experience in India and abroad. They dread that the large capital buffer available to banks sponsored by industrial/business houses would create an uneven playing field.

According to the RBI, suggestions on promoters' contribution ranged from 30 per cent to 100 per cent. There were also diverse views on the minimum initial capital requirement for new private banks. The federations and associations of industry and banks favoured a high start-up capital of Rs 1,000 crore, which could be raised up to Rs 1,500Rs 2,000 crore, because new banks would require high investments in technology for financial inclusion and to scale up operations to be viable. Higher level of minimum capital would also ensure that only serious players with long-term vision could enter the sector.

The dominant view of industry associations and banks was that general banking licences should be given to new players to ensure a level playing field.

Concentration in any geographical area or business line, such as, financial inclusion, would be an unviable proposition.Financial inclusion should be market driven, but not prescribed, they said

Since new banks need to cope with the objective of financial inclusion and also comply with stipulations on reserves, liquidity and priority sector advances, the feedback was that they should be given certain time period to achieve the objectives.

According to the feedback, the ownership structure of large industrial or business groups may open opportunities for regulatory arbitrage. In cases where the apex entity of a financial conglomerate is an unregulated entity, there could be gaps in risk assessment and supervision, and associated contagion risk within the financial conglomerate concerned and the wider system, it warned.

The other view expressed was that industrial or business houses having predominant presence and experience in the financial sector (for certain years, say 10) could be considered granting banking licence after examining their track record of dealing with public deposits and considering their exist ing retail customer base.

India already has a concentrated wealth structure, the feedback noted, which influences political decisions. Allowing industrial houses to own banks will exacerbate the concentration of economic power and political influence. However, as an experiment, a couple of industrial houses could be allowed to own restricted small banks and the future moves should be based on this experience.

The middle-of-the-road view was that inherent conflict of interest with industrial houses setting up banks could be addressed through strong regulation relating to connected lending, mutual lending to each other's sponsor groups, ring fencing of the activities, governance standards and exposures that could be clearly ad dressed through licensing conditions. Violation of regulations should attract severe penal action, including withdrawal of the licence.

According to the feedback, there may be value in experimenting with industrial or business houses and the dual license structure offers some scope for it. A couple of industrial houses with substantial integrity could be given restricted small bank licences.

Whether the industrial or business houses' licence is upgraded will depend on their performance and supervisory comfort with them.

Establishing many small and mid-size banks will help lenders to be innovative in delivering local need-based services to low income and poor households.

Source :- My Digitalfc