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Business News/ Industry / Banking/  Firms gear up to start new banks
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Firms gear up to start new banks

RBI may release final guidelines for new bank licensing norms in January to allow entry to more private banks

If one goes by the recent comments of the RBI top brass, the central bank is extremely reluctant to allow corporate house to float banks, given a choice. Photo: Abhijit Bhatlekar/Mint (Abhijit Bhatlekar/Mint)Premium
If one goes by the recent comments of the RBI top brass, the central bank is extremely reluctant to allow corporate house to float banks, given a choice. Photo: Abhijit Bhatlekar/Mint
(Abhijit Bhatlekar/Mint)

Mumbai: Reserve Bank of India (RBI) is likely to release the final guidelines for new bank licensing norms in January to allow entry to a third set of private banks in the country’s 70 trillion banking system, three years after former finance minister Pranab Mukherjee announced the plan.

Following Mukherjee’s announcement, RBI first issued a discussion paper in August 2010 and followed it up by releasing draft guidelines a year later, in August 2011.

In its draft guidelines, RBI has clearly stressed on the eligibility of promoters, past business performance of the firm, and impeccable corporate governance standards as a prerequisite to apply for banking licence.

“Past records of customer service and good corporate governance standards will be highly critical while deciding the prospects of the aspirants this time," Neeraj Aggarwal, partner, financial services at the Boston Consulting Group. “Any efforts to build capability by way of some last-minute attempts to demonstrate their eligibility to RBI which is not deeply ingrained in their operations might not work."

Mint has done a SWOT analysis of 15 companies that have shown interest to start a bank once the central bank finalizes the rules.

If one goes by the recent comments of the RBI top brass, the central bank is extremely reluctant to allow corporate house to float banks, given a choice. “We are painfully aware of the pitfalls, but we will make sure that regulations are not subverted," deputy governor Anand Sinha said in October in Pune at a seminar.

The government has addressed the regulator’s concerns by amending the banking law and empowering RBI to supersede a bank board that is not delivering and the right to inspect group companies of the promoter of a new bank. The Indian central bank can dismiss a board and appoint an administrator to run a bank for up to one year.

Following the nationalization of 14 larger banks in 1969 and six in 1980, RBI has so far given licences to only 12 banks in two phases, including conversion of a cooperative bank into a commercial bank.

In the past, the apex bank’s stated objective behind giving licences to new banks was to introduce competition in the banking sector, which was largely dominated by government-owned banks.

This time, the prime focus is to promote so-called financial inclusion, or increasing the reach of financial services to the unbanked population in the country. At least 40% of India’s adult population does not have access to banking services.

These were Global Trust Bank Ltd, ICICI Bank Ltd, HDFC Bank Ltd, Axis Bank Ltd, Bank of Punjab, IndusInd Bank Ltd, Centurion Bank, IDBI Bank Ltd, Times Bank and Development Credit Bank Ltd.

In 2003-2004, RBI issued licences to two more banks—Kotak Mahindra Bank Ltd and
Yes Bank Ltd.

From the first lot, Times Bank was merged with HDFC Bank in February 2000—the first so-called friendly merger in India’s banking history and also the first that was done by swapping shares.

Global Trust Bank was forced to merge with Oriental Bank of Commerce Ltd in August 2004 after the Hyderabad-based bank crumbled under the burden of non-performing assets because of its exposure to stock markets.

Bank of Punjab was acquired by Centurion Bank in June 2005 to form Centurion Bank of Punjab. Three years down the line, in May 2008, HDFC Bank took over Centurion Bank of Punjab.

ICICI Bank, HDFC Bank and Axis Bank (formerly UTI Bank), promoted by financial institutions, have emerged as the top three private banks in the country.

ICICI Ltd, the project finance institution that promoted ICICI Bank, was merged with the bank in 2002 as the institution found it difficult to survive when its access to cheap funding dried up and competition between financial institutions and commercial banks intensified. Industrial Development Bank of India (IDBI) too followed the path of ICICI and got itself merged with IDBI Bank Ltd in 2004.

Kotak Mahindra Bank and Yes Bank, the two latest entrants, have been doing well.

This time around, RBI may give licences to eight-nine new banks over the next two-three years, said Monish Shah, senior director at Deloitte in India. “It’s going to be a mix of companies with good promoter backing and governance standards. Well governed NBFCs (non-banking financial companies) too will have a chance."

Wiser with experience, the central bank has plugged the loopholes of potentially weak banks securing entry to the industry by stipulating strict conditions with regard to minimum capital and organization structure, experts said.

“RBI is determined not to repeat the mistakes it did in the past while awarding licences to banks; many of them could not survive," Ashvin Parekh, partner financial services at Ernst and Young India.

“The central bank will be eager to look at the actual capital strength of the group/company rather than merely looking at the book capital numbers while selecting the right candidates," Parekh said.

The regulator is expected to stipulated 500 crore as the minimum capital base for new banks, and groups with high exposure to real estates and the broking business are unlikely to find favour with RBI.

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Published: 30 Dec 2012, 11:49 PM IST
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