Govt against granting banking licence to PSUs

 The finance ministry is not keen that public sector entities seek new banking licences unless backed by a sound logic.

   This could end banking ambitions of a few state-owned non-banking finance companies (NBFCs) such as Power Finance Corporation (PFC), which has shown interest in acquisition in the banking space or securing a new licence.

   “These entities have been set up for meeting funding requirements of a specific sector,” said a senior finance ministry official, adding that such companies should concentrate on their core activities.

  The finance ministry also feels that giving new licences to state-owned companies is also at odds with its attempts to push through consolidation among public sector banks.

   Power Finance Corporation, Rural Electrical Corporation, Indian Railways Finance Corporation are some finance companies set up to meet the fund requirements in their respective sectors. These companies also enjoy the status of infrastructure finance companies, which allows them substantially relaxed terms from RBI.

   “The central bank has already lowered the risk weight on loans to help them to lend more to the power sector,” said a power ministry official.

   Besides, they have also been allowed to raise cheap funds through budget proposed infrastructure bonds, which negates the reason for them seeking cheaper retail funds through a banking licence. Moreover, the focus of the banks that will be given new licences will be more on financial inclusion, which is not the mandate of specialised finance companies.


   “RBI has already indicated that the stress would be on expansion in unbanked areas,” the power ministry official said. For NBFCs such as PFC and REC, the current administrative ministry is the power ministry.

   Current RBI guidelines do not allow a state-owned finance company, central or state, to convert itself into a bank. “There is no case to tweak this structure in the new guidelines for state-owned companies,” an RBI official said.

   As per the existing guidelines on banking licences, a single entity or group of related entities, directly or indirectly, cannot have a shareholding or control of more than 10% of the paid-up capital of the private sector bank.

   RBI is expected to come out with a discussion paper on new banking licence guidelines by the end of this week. The move comes after finance minister Pranab Mukherjee in his budgetary speech announced that the government is looking to allow more private sector players in the banking industry.

   It is understood that private sector players such as Reliance Capital, Mahindra, Cholamandalam and Tata Finance have already expressed their interest in acquiring a banking licence.