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RBI sets five-year time-frame for conversion of FIs into banks

The Reserve Bank of India has suggested a time-frame of five years to consider the issue of transformation of domestic financial institutions into banks.

According to the central bank, the financial sector has to develop alongside the financial markets to provide adequate competitive services among all financial intermediaries, and DFIs will continue to be an important source of finance for the industry till the capital market and the debt market are fully developed.

In a discussion paper on "Harmonising the Role and Operations of DFIs and Banks" released today, the RBI has also proposed that the DFI that converts into a bank should fully conform to all prudential, regulatory and supervisory norms, which are applicable to banks.

According to the RBI's draft proposals, which have been incorporated in the paper, DFIs should be given the freedom to become non-banking finance companies by specialising as a DFI or to become commercial banks as envisaged in the Narasimhan Committee report.

Acknowledging that DFIs possess better project appraisal skills than banks, the RBI has proposed that small- and medium-sized firms continue to depend on DFIs for long-term financing.

However, the RBI said that DFIs have yet to plan and acquire necessary expertise in offering various in-house banking services and develop an appropriate branch network. Also, the policy environment and regulatory and supervisory framework has to evolve to transform DFIs into banks.

The RBI's draft proposals in the paper aim to address three main issues -- approach to universal banking, meeting the long-term capital requirement of the corporate sector and the future role of DFIs and refinancing institutions.

When the DFI chooses to transform itself into a bank, the transitionary arrangements, on a time-bound basis, could be worked out after a case-by-case examination by the RBI. The central bank has proposed adding that if the DFI conforms to the totality of regulatory framework of a bank, the RBI would have no objections.

The RBI has said that the options before the DFI are to provide specialised services as an NBC or continue to adopt the conglomerate route with a banking subsidiary or transform into a bank.

Some DFIs have already invested in banks and have promoted the banks, which are now their subsidiaries. If the DFI chooses to provide banking services by itself, through a wholly-owned subsidiary route, permission to set up a fully-owned subsidiary could be considered by the RBI.

''However, when a bank is a subsidiary of the DFI or in conglomerate with a DFI, adoption of a consolidated approach for regulation and supervision of such institutions is essential in view of the special status of banks in the financial sector,'' stated the RBI.

The discussion paper contains several statements on universal banking practices in select countries, pre-reform and current status of financial sector in India, various subsidiaries set-up by banks, FIs, FI ownership, organisation and functions and regulatory and supervisory regimes for banks, DFIs and NBFCs.

The RBI proposals would be put forward for discussions and comments by experts in banks/FIs and other market participants and also the general public would be sought. The RBI would take a decision on the proposals after considering the suggestions of these experts and in consultation with the Central government.

The paper is a culmination of the efforts of an internal group constituted by the RBI to study the roles of banks and FIs and suggest areas of harmonisation between the two entities.

The group was contituted after a working group headed by former IDBI chief S H Khan submitted its final report on the issue to the RBI in May 1998.

UNI

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