RBI's concerns on stability, systemic risks is valid: EY

Ernst & Young's Ashvin Parekh explains that the RBI's clause limiting the eligibility of the banking licence arises from concerns regarding the stability and systemic risk to the banking sector as against the finance ministry's aim to bring in more funds to the banking sector which will aid in boosting the growth of the economy.

Also Read: FinMin finalises norms for new bank licences, sends to RBI

Below is an edited transcript of the analysis on CNBC-TV18

Q: The Reserve Bank of India (RBI) had announced that promoters of real estate companies who were in anyway connected to the broking business stood disqualified or were ineligible for a new bank licence. The finance ministry has suggested that there was no need to restrict businesses of new bank-promoter groups because they remained unexposed. So, do you believe the finance ministry is right when it suggests so, which is a deviation from what the RBI had proposed?

A: There are two points of view- that the government is trying to look at vistas and venues by which more capital can be brought into banking sector to fund economic growth. The amount of capital required by the banking sector will need to keep growing as the economy grows.

The RBI, on the other hand, is looking at stability and is more concerned about systemic risks.

Q: Are you convinced that the finance ministry wishes to remove this clause added by the RBI?

A: The RBI documents point out the concerns with the price volatility in the market and the nature of the banking business could be considered speculative. To that extent I would say there is a good justification in the RBI's point of view.

Q: Do you see this passing muster with the central bank?

A: I think that on this particular aspect about the clarification on a non-operative holding company (NOHC) and a non-operative financial company the ministry is seeking a little more flexibility to make sure that some very eligible business houses are also entitled. To that extent, I would, in that particular case, certainly say there is some merit.

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