Conglomerates Barred From India Bank Industry Under Draft Rules

  • Draft guidelines published on central bank website on Thursday
  • Central bank seeking to expedite bank permit approvals

Indian conglomerates may be barred from entering the country’s banking industry under draft guidelines regulators are considering for new bank licenses.

While the proposed guidelines -- posted on the Reserve Bank of India’s website Thursday -- seek to allow the central bank to approve bank permits more frequently, they also say “large industrial or business houses” won’t be eligible to apply, without explaining why.

“Conglomerates are kept out to avoid conflicts of interests that arise when large business groups manage other people’s funds,” Nitin Kumar, a Mumbai-based analyst at Prabhudas Lilladher, said by phone. “As they have interests in various businesses, the RBI wants to ensure fairness and transparency by keeping these groups out of running banks.”

Companies that are within conglomerates controlled by billionaires Kumar Mangalam Birla and Anil Ambani were among contenders that failed to get licenses in 2014, when India awarded bank permits for the first time in more than a decade.

Under the new guidelines, the RBI said it will push to approve new permits on a “continuous” basis, or more frequently than the long periods between approvals under the existing system. That would increase “competition and bring new ideas” into the system, the RBI said.

Financial Inclusion

New banks will bolster financial services for Indians in remote towns and rural districts, and bolster lending in Asia’s fastest growing major economy. Recipients of the permits will be required to open their banks within 18 months, and one out of four branches must be located in towns with fewer than 10,000 people, the RBI said. The lender should have minimum paid-up capital of 5 billion rupees ($75 million).

According to the draft rules, individuals can apply for the permit if they have banking experience of at least 10 years. Companies controlled by resident Indians that have been in operation for at least a decade can also apply. Conglomerates may be allowed to hold as much as 10 percent in the newly created lenders, according to the proposed guidelines.

The central bank will be taking feedback on the draft guidelines until June 30, according to its website, though it didn’t say when the final rules will be released.

India has 27 state-run banks that accounted for more than 70 percent of outstanding loans as of March 2015, RBI data show. The country’s 22 private lenders, led by ICICI Bank Ltd., held more than 20 percent of bank credit, while about 45 foreign banks accounted for the rest, the data show.

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