Licensing new private banks: Corporate governance issues

Abstract

The corporate governance of banks is of vital importance due to the crucial role that banks play in an economy. The issue of corporate governance has become more important at this point of time when the Reserve Bank of India (RBI) is considering issuing licenses for new private sector banks given the recent scandals in the banking and financial services industry. This paper discusses why corporate governance is important for banks, especially from emerging economies point of view. The paper briefly discusses the current structure of banking industry in India, the need for new banks, the existing guidelines of RBI for issuing licenses to new private sector banks and the similar prevalent guidelines by regulatory authorities in other parts of the world. The corporate governance issues faced by Indian banks are also discussed. The views on whether the current guidelines by RBI take necessary precautions to prevent the instances of corporate governance failure, whether corporate houses should be allotted banking licenses, challenges that would arise if applicants are allotted banking licenses based on their profile are also expressed in this paper. Finally, the policy changes that RBI can adopt to promote banking activities in the unbanked sector of India while improving the quality of banking services have been prescribed.