Issue of Bank Licenses in India

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Why new banks in India:
For the growth of the economy it is necessary to have a greater depth and stability of the financial system. But beyond that for the growth to be truly inclusive our country requires a broader reach of the financial system. Expansion of the banking sector is especially necessary to enable the poor people to avail financial services like building savings, avail credit and to insure themselves against income shocks and various emergencies. Issue of new banking licenses: Difference of opinion between RBI and finance ministry: The finance ministry is constantly pressurizing RBI to issue new banking licenses. It has been a long time since Pranab Mukherjee, who was then the finance minister, first expressed the government’s wish to allow a set of private enterprises in the banking space in the budget 2010-11. This surprised the Central bank a lot because it was trying hard for consolidation in banking sector at that time. So at that time it refrained from taking the decision of who should be given the license and instead asked various stakeholders to come up with suggestions about that issue. The central bank was about to formulate the new banking guidelines on the basis these opinions. The reason behind showing such passiveness could be its reluctance to allow new players to enter the banking sector. The time span it took to come out with the discussion paper clearly showed the fact that it was not favoring the new banking licenses. Since then this issue has taken many turns. In August 2011 the Central bank had released few draft guidelines specifying the conditions related to eligibility of promoters, minimum capital requirement, business model and desirable corporate structure and governance standard of the applicant group. Bone of contention:

While the government is striving to speed up the process RBI wants the government to amend the Banking Regulation Act. RBI has made this thing clear in its draft guidelines that the process of...
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