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RBI proposes dilution of the govt's stake below 51% in PSBs

28 Aug 2013 Evaluate

In an attempt to reduce the fiscal burden on account of recapitalisation of PSU banks, the Reserve Bank of India (RBI) has proposed a 'continuous authorization' policy for new private banks and dilution of the government's stake below the 51% in public sector banks (PSBs), in its consultation paper on Tuesday. With a view of sustaining the competitive pressure on existing banks, while not straining the banking system as 'block' licensing may do, India’s Apex Bank strongly feels the case of reviewing the current 'Stop and Go' licensing policy and considering adoption of a 'continuous authorization' policy.

In its discussion paper titled ‘Banking Structure in India - The Way Forward, RBI has underscored that, in future there would be better pay-off in enabling PSBs to improve their performance while promoting private sector banks. Keeping this in mind, it has suggested government to consider diluting its stake below 51% in conjunction with certain protective rights by amending the statues governing the PSBs. Another alternative proposed is moving to a Financial Holding Company (FHC) structure.

The long-awaited discussion paper on the RBI's thinking also advocates the need for new entrants into the banking system, in line with the government's goal to reform a sector dominated by lethargic state banks and which only reaches half the country's households. Further, the report also reiterated its preference for foreign banks to establish subsidiaries in India, in a move that is aimed at ring-fencing their local operations from the overseas parents and bring them at par with Indian banks in terms of regulations.

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