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Economy Feb 6, 2013

Why RBI should go easy on bank licences

By Arjun Parthasarathy

The RBI's data on non-performing assets (NPA) of banks shows that public
sector banks (PSBs) have been the worst performers on the NPA front and
their capital adequacy has actually gone down in the June to September 2012

PSBs have the highest ratio of restructured standard assets to gross
advances with the ratio being 7.34 percent as of September 2012. The ratio
for PSBs stood at 6.67 percent as of June 2012 indicating that more assets
are being structured every quarter.


The fact that PSBs are seeing the worst of the bad loan problems raises many
questions on the way the banks are being run. Reuters

The ratio could go up if more real estate firms default on loans. The 37
percent fall in real estate firm HDIL stock price in the week before last is
an indicator of market perception of debt levels of leveraged real estate

The RBI has now released draft guidelines on provisioning norms for
restructured standard assets and this will hit PSU banks hard. Banks will
have to make provision of 5 percent on restructured standard assets starting April 2013 if the draft guidelines are accepted. The current provisioning norm is 2.75 percent for restructured standard assets.

The fact that PSBs are seeing the worst of the bad loan problems raises many
questions on the way the banks are being run. The government ownership of
the banks does not lend them much credibility in terms of managing risks.
Issues of crony capitalism also come into play while issues of directed
lending to problem ridden state electricity boards also affect the risk
management credibility of PSBs.

The government has to appoint the right professionals to manage PSBs and
maintain arms length distance in their functioning. This move will then add
credibility to the perception of PSBs in the eyes of investors and rating

The government is trying to push the RBI in giving out new banking licences
with daily media reports on what kind of corporates can be given these
licences. The fact that the government is getting involved in new bank
licences at a time when its own banks are showing the worst performance in
the banking sector leads to serious questions on the intentions of the

The RBI will only give out a few licences based on merits but given the
government involvement there will be raised eyebrows on why certain
corporates received licences and certain corporates did not receive

The RBI should hold back on bank licences until the banking sector gets back
on track with balance sheets improving. The government should leave the RBI
on the banking licence issue.

PSBs are a bad enough example of the government's involvement in the running of the banks. The economy certainly does not need fresh worries of crony capitalism when corporates are given bank licences.

The issue of licences is tricky. Bank licences can be limited only to a few
and the process should be highly transparent. The past experience on
allocation of licences in telecom spectrum and coal mining has resulted in a
whole lot of controversy. Corruption cases are still going on in the telecom
and coal scams.

The RBI has a tough job in giving out fresh bank licences. The ones who do
not get will raise a hue and cry on why they were not allotted. The ones who
get will come under intense media scrutiny. The last thing the RBI needs
when it is fighting the rising NPAs, rising fiscal and current account
deficits and rising inflation is a bank licence scrutiny.

Arjun Parthasarathy is the Editor of, a web site for investors.

by Arjun Parthasarathy

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