Risks in New Banks Licensing

The need for licensing of new banks has to be genuinely assessed and the RBI has to be extremely cautious in granting the approval. External pressures have to be dealt with firmly and applications from companies which have  diversification to various segments particularly real estate and other speculative segments have to be out rightly rejected as their need for funds is huge and chances of diversion of deposits raised from public at large cannot be avoided.even if regulations are in place. RBI cannot take any regulatory risk damaging its own reputation as happened in the case of GTB in late 1990s.The fit and proper criteria of Directors of GTB was conveniently ignored and the bank had to be finally closed by merging it with OBCLtd in 2004. It is going to be a litmus test for RBI for  issue of licenses to Corporates to start banks. The new contenders have some corporates with lot of diversification  including real estate business  and facing  litigation in some courts. As long as housing sector does not have proper regulation, Corporates have ample scope to misutilise the funds and RBI will have to face the music if something seriously goes wrong.  Prevention of danger is better than finding cure at a later stage when the damage would have been deep and unbearable to the economy. Will RBI assess the Risks ?

( This comment in a modified form is in response to a write up on New Contenders for Bank License  which appeared in The Mint dated 27/5/13).