The Reserve Bank of India (RBI) recently issued a set of clarifications on the numerous queries that had flooded its mailbox, 443 to be precise, following its announcement of the guidelines on issuing fresh banking licences in February this year.

It has been a decade since RBI issued banking licences in the country (the last two being issued in 2002-2003) and keeping in mind its financial inclusion targets, new banks seem like the much-needed fuel to keep the process moving.

If one is to go by these clarifications, corporate entities and public sector enterprises that have performed decently and have been in business for at least 10 years are eligible to apply. The ones deemed “fit and proper” by the central bank will be issued licences.

However, the uncertainty surrounding the granting of banking licence to the Tatas, Birlas, Mahindras et al continues to loom large as the RBI has refused to spell out the exact criteria on which it will decide if the applicant is “fit and proper”. 

According to the 165-page clarification released by the RBI on June 3, “The requirement that promoters and promoter groups should have a past record of sound credentials and integrity as a part of 'fit and proper' criteria is a matter of overall judgment and no indicative criteria can be spelt out.”

Not so much of a clarification, is it?

So now if one thinks they have managed their business well, on whatever grounds, they will go through the tedious process of applying in the hope that they’ll be awarded the licence. But hey, not so soon!

Even if the applicants have fulfilled the spelt-out criteria – including holding norms, credibility of promoters and the company, etc – the central bank reserves the right to dump an application subject to its perception of the applicant being not “fit and proper”.

Among other guidelines, the central bank has decided to seek feedback about every applicant from other regulators (read Sebi and IRDA) and enforcement and investigative agencies such as the income tax department, CBI and the enforcement directorate. So for all those corporate houses and its promoters under the scanner of these agencies, it is game over at level zero!

Meanwhile, there is some respite for the selected applicants as the RBI, in a bid to smoothen the transition phase of promoter groups to the prescribed structures, has raised the deadline from 12 to 18 months following the granting of licenses.

Is the RBI is being extra cautious, considering the ease with which corporates tweak rules for profits? Banks are considered the spine of an economy and hence the apex bank cannot go about mindlessly distributing licences, but then like everything else too much care and prudence is definitely not a good idea. Risks can be averted only to some extent but it is foolish to think they can be completely eliminated.

While the idea of giving out fresh licences came as a cheer, for it would ensure banking facilities even for those sitting at the so-called bottom of the pyramid and boosting fair competition among the existing banks and new entrants, the announcement of guidelines and clarifications have acted as a party spoiler.     

Prevention is definitely better than cure (whatever happened to the three private banks recently accused in a sting operation of flouting norms?) but then the guidelines which should have encouraged participation do exactly the opposite.

This is only the beginning and there is still a long way to go but as they say, “A job well begun is half done.” Not that the guidelines issued by the central bank are completely useless but then what is the fun of watching a game that begins with an initial round of numerous eliminations even before the referee blows the whistle!