India to Allow Corporates to Open Banks Despite Concerns

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By Geetha Pillai | February 11, 2013 9:49 PM EST

India Plans to Allow Corporates to Open Banks

India's finance ministry is planning to issue licenses to corporates to enter the banking sector in the country which is so far dominated by state-run banks.

India's big corporate houses such as the Tata Group and Reliance had already expressed interest to enter the sector, though the final rules are yet to be completed.  

The delay in finalising the rules revolves around disagreements between the government and the central bank regarding whether the traditionally more financially volatile sectors of property and brokerages should be allowed to apply for licences, which the central bank opposes, the Reuters reported.

"The RBI has drawn up draft guidelines, guidelines say that more licenses will be given to the private sector. .. the governor told me he will give out guidelines in two weeks," Palaniappan Chidambaram, India's finance minister told Reuters television earlier.

"If the guidelines are made out and transparently spelt out and if a corporate satisfies those guidelines, I don't see any reason why a corporate should not be given a license".

The Reserve Bank of India's misgivings in the matter was even shared by the International Monetory Fund (IMF) which in its note on India in January mentioned that the risks may outweigh the benefits.

The reasoning behind the move is to facilitate wider inclusion of India's 1.2 billion people, half of which is outside the banking sector as well as to provide fresh impetus to the economic growth that is lagging behind neighbour China.

Since 2004, the Indian government had not given licenses to the private sector banks and with the new rules many private financial firms would be able to apply for license.

However, critics of the development are worried that the reform could backfire and trigger a broader crisis if lending from one branch of a firm to another goes bad.

Among the possible applicants, L&T Finance, part of construction major Larsen& Toubro, Anil Ambani's Reliance Capital have disclosed that they are interested in applying for the license. Some of the other hopefuls include Mahindra Finance, Bajaj Finance and Shriram Capital, all are part of India's corporate houses. 

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