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ew Bank Licenses: JUDICIOUS SELECTION CRITICAL, By Dhurjati Mukherjee, 15 July, 2013 Print E-mail

Events & Issues

New Delhi, 15 July 2013  

New Bank Licenses


By Dhurjati Mukherjee

Better late than never, would be an appropriate adage for the Finance Ministry’s move to get working on issuing new bank licenses. The announcement was made by Finance Minister P Chidambaram in his Budget speech in 2010. Industrial houses in financial services with non-banking financial companies (NBFCs) see this as an opportunity to fully penetrate into the segment. However, the situation today has changed drastically, from the times when UTI Bank – now Axis Bank – obtained a license in 1994.

There is no denying that there is need for far many more banks, but the justification cannot be alone for the sake of competition. Banks are necessary more in semi-urban and rural areas to reach out to the population, which has no access to these years after Independence. Also as the country continues to lag in financial deepening ratios, which have a positive link with growth, the Reserve Bank of India (RBI) might use new banks as an instrument to facilitate financial deepening. 

While there are 26--Corporate houses, non-banking finance companies, government entities and broking companies, in the race for getting the licences, it’s anybody’s guess how many of these would be given the go-ahead by the RBI. However, the apex bank should grant licenses to only well known corporate houses with good financial standing in the coming years. The minimum amount of capital should be set in a way that furthers deepening. This means that the capital requirement should be high to ensure commitment with sufficient resources and foster financial deepening. It can ill-afford to go wrong in its assessment.

The RBI’s earlier guidelines provide insight into how it proposes to choose between the bank license’ applicants. First, it would evaluate the credibility of the promoter and examine his track record. Second, it would review the business plan of the applicant and whether it believes the applicant bank would survive and thrive. The RBI would obviously want players who want to commit in the long-term rather than those who are out to make a quick buck.

Third, the RBI would analyze what the new bank would do to improve the operations of the industry. It would need to assess whether the new entrant has innovative business models that can allow it to improve customer service, payment systems, technology platforms, risk management and overall efficiency.

Finally, the successful applicants would need to demonstrate whether it could support national priorities. These include facilitating financial inclusion, providing finance for agriculture and rural development, to micro, small and medium enterprise (MSME), addressing regional disparity and supporting infrastructural development.

It needs to be pointed out here that despite having the world’s largest network of around 80,000 banking outlets we still have around a mere 16 crores or so saving bank accounts for a population of 120 crores! While the Government has been harping on the need for financial inclusion, it is quite natural that access to a saving bank shall be the measuring indicator. 

The RBI obviously must realise that in the background of no banks around their vicinity, a very large segment of the population gets hoodwinked by the unholy chit funds operators who revel in cheating the poor. The recent scam of the Saradha Group in West Bengal and other adjoining States of eastern India is a clear pointer. Understandably, people in rural and remote areas do not like to travel a long distance to deposit money in banks and prefer to keep money in chit funds, because it is convenient and more so because the returns are much higher.

Apparently, if the new banks concentrate in the semi-urban and rural areas, the much needed financial inclusion could perhaps be achieved. Moreover, a major segment of the population can be freed from the clutches of unscrupulous money lenders who are out to exploit the backward sections.

Although the bank licensing was opened in 1994, 25 years after nationalization, the RBI has been tight-fisted with licenses and only six new generation banks exist today. After Yes Bank in 2003, no new bank has been given a license. Presently the RBI indicated that licenses would be issued in September this year and promoters would have 18 months to complete all necessary formalities to launch operations. These include bringing in capital of Rs 500 crores, transferring the financial business under a non-operating holding company and arranging requisite infrastructure.   

Well known names, including Aditya Birla Nuvo, Tata Sons, Reliance Capital, L&T Finance, Value Industries, Bajaj Finserv and Religare Enterprise, are among the 26 companies which have applied for a banking license. While Religare has teamed up with Customers Bancorp Inc. (CUBI) which would be investing $ 51 million in the company through a combination of primary and secondary market investments, Reliance Capital announced two financial institutions from Japan – Sumitomo Mitsui Trust Bank and Nippon Life Insurance -- would take between 4 and 5 per cent stake each in the proposed new bank of the company.

Apart from these, Srei Infrastructure Finance and Magma Fincorp, both from Kolkata, are strong contenders for the new bank licenses. The former is building up a strong case as it has been a leading player in infrastructure finance and claims to have has branches across the country. Its group company Srei Sahaj is rooted to the rural sector and is active in eastern India. A surprise contender, however, is Suryamani Finance, a group company of Pawan Ruia of Dunlop Tyres, also of Kolkata.

Among the public sector entities, India Post, IFCI and LIC Housing Finance are also in the running. In particular, India Post is hoping to be seen as a strong contender, as it has branches in remote areas its postal offices could easily carry out banking activities.          

Most of the private sector companies are almost ready and may not take more than six months to start operations. At least five to eight applicants are well known companies and would not have any difficulty in adhering to RBI stipulations. But it needs to be ensured that in granting licenses, the RBI should at least specify that 50 per cent of the branches would have to be opened in rural areas so that the objective of bank expansion is achieved in real terms.  

There is speculation that while all 26 contenders shall not be granted licenses, at least 10 could be given the green signal this year, with a review carried out next year for the remaining ones, of course if they wish to be in the running still. While the RBI will tread cautiously, there is no denying that the Government’s decision to grant new bank licenses is a step in the right direction. Indeed, it should help the overall process of economic and inclusive development, as promised. ---INFA


(Copyright, India News and Feature Alliance)



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