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Bank licences: Can ‘fit and proper’ be non-discretionary?

The issuing of payment bank licenses to 11 entities was recently criticized as arbitrary by the economist and former cabinet minister Dr Subramanian Swamy and Ajay Shah. The questions raised by the two were on the process and not an aspersion on the committee.

In August, the Reserve Bank of India (RBI) today granted in-principle nod to 11 payment banks applicants. In total, the RBI had received 41 applications for payments banks.

One of the objections made is that the Reserve Bank should clearly stated minimum qualification required of a payment bank. The other objections include issuing notices to rejected candidates stating reasons and rationale behind it. These candidates should be allowed to appeal in an appellate body.

Going by the standards specified by these economists, banking licenses given by the RBI since 1995 fall short. All major banks – HDFC Bank, ICICI, Kotak, Yes Bank, and the more recent ones like IDFC and Bandhan are included in this.

Shah, while explaining, compares the method of giving license to payment banks to that of allocation of coal blocks, which the court found arbitrary and opaque.

Here, it becomes important to draw proper differences between a bank and issuing coal or aluminum license. Banks are those institutions that common people entrust their savings to. Hence, it becomes important to ensure that “fit and proper” entities get the licenses. Same is not true for coal miner or an aluminum maker.

Another point to be noted is that failure of a steel company does not entail fiscal intervention. In case of banks, fiscal intervention in case of failure is a must.

In a country like India, failure of a bank can deeply scar the internal system, which is why the RBI and government have always prevented commercial banks from failing.

On the other hand, one cannot decide whether an entity is fit and proper just on the basis of balance sheet strength. The regulator has to be vested with a modicum of discretion. The discretion may be sought to be tempered by passing the decisions through various committees as has been done in the case of payment banks – first an external committee, then an internal committee and then the RBI board itself vetting the selection.

Shah point is correct – that the candidates need to be told in writing the reasons for rejection and they ought to get a chance of hearing from a group of experts other than the selection committee.

The RBI may incorporate these suggestions when it draws up the criteria and processes for on tap licenses. But, I would still prefer that a large of dose of discretion lie with the central bank given that banks are “special”.

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