Entry of New Banks in the Private Sector – Discussion Paper

This discussion paper outlines past approaches to new banks in India, international best practices, ownership and governance guidelines, pros and cons of policy parameters in licensing new banks, and the costs and benefits of increasing the number of banks.

The paper follows the announcement by the Union Finance Minister in the 2010-2011 budget speech that RBI would consider giving additional banking licenses to private players. The paper gives an overview of the following areas:

• RBI’s approach to new banks and its experience since financial sector reforms during the 1990s;
• Recommendations of expert committees and lessons from the global financial crisis;
• International and Indian experiences on considerations such as minimum capital requirement, minimum and maximum caps on promoting shareholders, foreign shareholding in new banks, eligible promoters, and business models.

The paper includes a synopsis of select country practices and legal frameworks on licensing of new banks in the private sector. The paper states that expanding the number of banks would foster competition, reduce costs, improve quality of service, promote financial inclusion, and fuel economic growth.