MUMBAI, May 21: The Reserve Bank of India (RBI) is likely to shelve issuing licences for new private sector and local area banks as it has come under fire for issuing an ``in principle'' banking licence to the shady CRB group, say RBI sources.

While some groups -- like Cox & Kings Travels and Finance (the leading travel agent) have obtained licence and are working overtime to formally commence operations, others may be disappointed. As part of the financial sector reforms the RBI has been trying to encourage competition in the banking sector by allowing entry of new private sector banks.

As per the 1996-97 budget announcement that new private local area banks, with jurisdiction over three contiguous districts would be set up, the RBI has already granted similar in-principle approval to two local area private banks, one each in Maharashtra and Karnataka. Alpic Finance, one of the top five finance companies in the country, has set up Priyadarshini Local Area Bank Ltd covering the districts of Aurangabad, Jalna and Jalgaon in Maharashtra as per the approval granted by the central bank. Manglore based finance company of the Manipal group is the other company which obtained local area bank licence for Karnataka. Almost all the leading NBFCs have been lobbying with the RBI to set up local area banks.

Ten out of the 13 banks, approved in principle, have begun operations. The RBI's vague guidelines for the new entrants raised queries. Preference has been given to banks which proposed to have their headquarters at centres in which no other bank had their head offices.

The minimum paid-up capital of new banks was to be Rs 100 crore and the shares were to be listed on the stock exchanges. The RBI also said that preference will be given to groups which have sufficient experience in the financial sector. Hence the issuing of bank licence to CRB like other finance companies 20th Century Finance, Bennet & Coleman (who were having the finance company Times Guarantee).

The leading development financial institutions like HDFC, ICICI, UTI and IDBI are other finance companies which obtained bank licences. Industrial Finance Corporation of India (IFCI) like several other finance companies has also applied for a private bank licence. The RBI was planning to issue fresh licences after the first 13 banks approved in the first round start their operations in full swing.

The CRB episode also indicates that the RBI inspection team did not properly analyse the balance sheet and the quality of assets of the parent company before giving in principle banking licence. ``The inspectors should have analysed the asset quality of parent companies and verified whether the profit shown by the finance company is only through book entries. Further, the finance companies do not have asset base and are doing, more or less, a brokerage business in lending and borrowing from different sources.

``With the help of statistical juggling, a finance company can easily show a good profit. Before issuing a bank licence, the RBI should have found out whether the company's assets could sustain the liabilities in the long run,'' opined a senior RBI official preferring anonymity.

The central bank should have scrutinized the latest balance-sheets of all the leading finance companies before issuing bank licences. Other leading finance companies are not much different from the CRB.

In the case of the CRB group, an RBI inspection was done in September-October 1996. But the huge investments made by the CRB group were in dud assets and other group companies whose current market value is substantially lower than the value shown in the balance-sheet as assets.

``As both the primary and secondary market were in bad shape, whatever money invested by the CRB group in these dud assets depreciated considerably. A lot of money which never came back was loaned in the inter-corporate deposit market (ICD). The company also lost heavily in the bought-out deals business,'' added RBI sources.

``Currently, the RBI follows mainly offsite inspection of finance companies by periodically calling for the balance-sheet, statement of accounts and by calling the concerned senior officials. Lack of vigil has bolstered the finance companies into brashness,'' added RBI sources.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.