Onus is on RBI to find ‘fit and proper’ bank licencees

February 26, 2013, 11:36 am IST in Myth-n-Reality | Companies | ET

A central bank whose credentials are beyond doubt can alone ensure integrity of the banking sector

The Reserve Bank of India (RBI) has clearly ceded space to the finance ministry in its final norms for new bank licences. Despite reservations voiced by the Bank itself in the past and seconded by experts such as Nobel-prize winning economist, Joseph Stiglitz, the Bank has opted not to exclude corporates, especially those involved in real estate and the brokerage business.

It has, instead, tried to protect the integrity of the banking sector by devising a fairly complex capital structure for the non-operative financial holding company that will ‘hold’ the bank. The idea is to ring-fence the bank from other activities carried on under the NOFHC umbrella and limit the scope for unscrupulous elements to use bank funds for lending to related parties.

Prima facie the safeguards look sound and provided the bank is proactive in its oversight there is no reason to fear the new norms will open the floodgates to less desirable elements.

The ultimate safeguard, however, is the RBI’s ability to take an unbiased and independent view on who is ‘fit and proper’ to promote a bank. As long as that is not compromised we need not fear. Now more than at any other time, the RBI must strive to guard its relatively clean image. Given the pulls and pressures, it is not going to be an easy task.

DISCLAIMER : Views expressed above are the author's own.


Mythili Bhusnurmath Mythili Bhusnurmath
Mythili is consulting editor, The Economic Times.

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