News: ‘Allow industrial houses to set up banks’

(BL 02/09/2006) Mumbai - The Tarapore Committee on Fuller Capital Account Convertibility has recommended allowing industrial houses to set up banks.

The report of the Committee , which was released on Friday, suggested that RBI can evolve policies to allow, on a case-by-case basis, industrial houses to have a stake in Indian banks or promote new banks.

The policy could also allow non-banking finance companies to convert into banks.

These measures would address the capital requirements of public sector banks, said the report of the Committee chaired by S.S. Tarapore.

After exploring these avenues until 2009, foreign banks may be allowed to enhance their presence in the banking system.

All commercial banks, including public sector banks, should be incorporated under the Companies Act, as this would provide a level playing field, according to the report.

The Committee has also suggested that the share of Government or RBI in public sector banks should be reduced to 33 per cent from the current level of 51 per cent.

This was one of the recommendations by the Committee as part of measures for strengthening the banking system.

Currently, the minimum Government stake in nationalised banks is 51 per cent, and 55 per cent in the case of SBI.

Reduction in Government stake was also recommended by the Narasimham Committee on Banking Sector Reforms (1998).

According to the report, reduction in Government stake would not alter the positive aspects in the public sector character of these banks, which do have certain social objectives to fulfill.

The Committee has also recommended that transfer of ownership of SBI to the Government should be put on hold, given the imperative need for strengthening the capital of banks in the context of Basel II and FCAC.

This would ensure that increased capital requirement for a sizeable segment of the banking sector is met for the ensuing period.

As another measure to strengthen the banking system, institutions must be encouraged to set up new private banks, said the report.

In the first round of setting up new private sector banks, those with institutional backing turned out to be the successful banks.

With regard to public sector banks, the Committee said that issues such as powers of the Boards, hiring of personnel with requisite skills in specialised functions and succession planning require early attention.