The banking regulator, Reserve Bank of India, has been asked by the Finance Ministry to give permission to real estate firms and broking companies to open banks in the country. The ministry is of the view that while doing so there will be enough safeguards in place to check the exposure of promoters to associated entities.
While urging the central bank to take this step, Finance Ministry said that such firms can be permitted to enter banking sector, but, there must be a full prohibition on acquiring exposure in related entities or entities linked to promoters.
According to sources, RBI guidelines on issuing new bank licenses which will be released soon, prevent even a vendor or major clients of such promoters from availing a loan from such a new bank. The move is aimed at minimizing the buildup of risk. As a result, the CEO of a bank is prevented from extending loans to group entities and is prevented from misusing his influence.
On the matter, the draft guidelines on issuing new bank licenses to private sector entities state, "entities or groups having significant (10 per cent or more) income or assets or both from real estate construction and or broking activities individually or taken together in the last three years will not be eligible."
The draft further adds, "More importantly, in India, past experience with brokers on the boards of banks has not been satisfactory. It will therefore be necessary to ensure that any entity/ group undertaking such activities on a significant scale is not considered for a bank license."