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Election Commission allows RBI to issue new bank licences

RBI governor Raghuram Rajan referred the issue to the EC despite stiff opposition from the finance ministry.

Written by Surabhi | New Delhi | Updated: April 2, 2014 8:28 am
Raghuram Rajan referred the issue to the EC despite stiff opposition from the finance ministry. Raghuram Rajan referred the issue to the EC despite stiff opposition from the finance ministry.

With the Election Commission giving the green signal, the central board of directors of the RBI is expected to clear the list of companies eligible to get a bank licence at its meeting on Wednesday.

The decks for the crucial meeting were cleared after the Election Commission Tuesday allowed the central bank to proceed with granting the licences, the first such exercise in more than a decade.

“The commission is of the view that Reserve Bank of India may take necessary action as deemed appropriate by the bank” for giving the licences to the companies that have applied for it, the poll panel said in a letter to RBI governor Raghuram Rajan.

The matter was referred to the Commission by the RBI on March 12 since the model code of conduct had come into place for the general elections before the bank could come out with the list.

The final list has been drafted by deputy governor H R Khan Tuesday evening to be placed before the board. Corporate groups are expected to figure in the list of eligible applicants. According to a source, the RBI could start giving the new permits by the end of April.

Permission to set up new banks in the sector dominated by PSU banks is considered one of the most significant reforms in the sector.

Allowing corporate houses to set up banks for the first time after a bulk of the sector was nationalised in 1969 has been quite a controversial step. The plan for new bank licences was announced in the budget for FY2011 but took time to flesh out.

“Once they (EC) say there is no issue there, then RBI would be in a position to announce the bank licences very quickly after taking it to the committee of the central board,” Rajan told reporters earlier on Tuesday.

The RBI in its first bi-monthly Monetary Policy Statement for FY15 also said that after this round of licensing it would graduate to a system of on-tap licences that will also include differentiated bank licences. Currently, all banks in India have to follow the same universal model of being a banker to every income or interest group which makes setting up a bank a costly affair.

Rajan referred the issue to the EC despite stiff opposition from the finance ministry. On Monday, Finance Minister P Chidambaram had said the reference was one of RBI’s policy of “exercising abundant caution”.

While he did not mention if there would be political opposition to the move, Rajan was candid. “This (giving bank licences) is not in any way a political process. It is an economic and regulatory process and therefore seen as distant and different.”

Twenty-six companies, including several from the corporate sector, had applied for the licences on July 1.

With the addition of one company and the dropping out of the race by two, the effective number of applicants now is 25. The RBI had referred the list to former governor Bimal Jalan for due diligence. The committee submitted its recommendations on February 25.

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  1. K
    Apr 2, 2014 at 5:25 am
    The RBI Governor must be applauded for his independent decision and refusing to be a puppet of the Finance Ministry opposing the move in seeking approval of the Election Commission for granting new banking licenses. It is hoped that licenses would be granted to Corporates keeping in view that no single Corporate House, however big, is allowed if it already has its stake in every conceivable field of economy from retailing, textiles, heavy industries, petroleum, gas, Information Technology and so on. Or else, it would be disastrous for the country for obvious reasons. In this perspective, the matter of giving licenses to Corporates has political connotations without any doubt whatsoever.