Events
& Issues
New Delhi, 15 July 2013
New Bank
Licenses
JUDICIOUS
SELECTION CRITICAL
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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