Almost three years after the Indian government announced its intention to open up the banking sector for a new set of private banks to expand banking services, the Reserve Bank of India (RBI) last week released the final guidelines on the licensing norms for such banks. There is no surprise in the guidelines even though there are minor deviations from the draft norms. For instance, the draft norms, released in August 2011, had said corporate entities earning at least 10% of their revenues from broking or real estate business would not be eligible to apply for a banking licence. The final norms do not have this provision.
But that should not give one the impression that RBI will welcome such companies to the banking space with open arms. The final guidelines say, “Promoter/promoter groups’ business model and … culture should not be misaligned with the banking model and their business should not potentially put the…banking system at risk on account of…activities..speculative in nature or subject to high asset price volatility”. This means, RBI has merely changed the language of the guidelines but not its stance.
Similarly, the original idea was to open the sector only to private entities but the final norms say even public sector entities can apply for a banking licence. But it won’t be a cakewalk for state-run companies as they will need to set up wholly-owned non-operative financial holding companies to own the bank. Such holding companies have a very complex ownership pattern and not too many public sector entities will be able to float them.
The deadline for submission of applications is 1 July. A high-level committee will screen the applications even as the final call on granting banking licence rests with RBI.
Assuming that this committee will be given three months to scrutinize the applications, RBI will take a look at them in October and it is anybody’s guess when it will issue the first licence. Unlike in 2001, when the central bank had made it clear that “the number of licences to be issued in the next three years may be restricted to two or three of the best acceptable proposals”, this time it is silent on how many new banks it wants in the system. It merely says the licences will be issued on a “very selective basis” and RBI may not be in a position to give licences to all applications which meet the eligibility criteria. So, an element of subjectivity in the final selection cannot be ruled out even though RBI is committed to handle it transparently—the names of the applicants will be put on its website.
Well after two decades of bank nationalization, when RBI opened the doors for a set of new banks in January 1993, it had received 113 applications, many from large industrial houses. This time around, the applications are expected to be in hundreds as the universe of Indian corporations has expanded manifold in the past two decades and opportunities in the banking space are unquestionable with a burgeoning middle class with high disposable income and a predominantly young population.
Noted economist-bureaucrat Sharad Marathe, the first chairman of the erstwhile Industrial Bank of India, reviewed the first bunch of applications in 1993. Eight years later, in January 2001, when RBI issued guidelines for the second set of new banks, a three-member committee of I.G. Patel, former RBI governor; C.G. Somiah, former comptroller and auditor general of India; and Dipankar Basu, former chairman of State Bank of India, did the job. The central bank is yet to announce the names of the panel for the current round.
The candidates eligible to apply for a banking licence need to have a 10-year impeccable track record and they should never be under the scanner of any regulator, enforcement and investigative agencies. This is one criterion which very few corporations will be able to meet.
At this point, it’s difficult to guess who will get the licence and who won’t but it is fairly certain that there will be intense lobbying by various groups seeking to enter the banking business and, with the general election due in 2014, the government could be vulnerable to such lobbying. So, the profile of the high-level panel that will scrutinize the applications is critical and all eyes will be on the central bank’s use of discretion when it finally picks the winners. A banking licence cannot be sold to the highest bidder as banks don’t deal with limited natural resources but, at the same time, the selection process needs to be foolproof as banks deal with public money. The most critical factor which will differentiate one candidate from another—both fulfilling all eligibility criteria—will be the business plan. The new entrants need to see the enormous business opportunities in rural India, which most of the incumbents have either failed to see or have seen but could not cash in on.
Why RBI has taken three years to finalize the licensing norms is a mystery since the government has a limited role in this sphere. In fact, except for the aspect of foreign holding (which is being kept at 49% for the first five years) the government has nothing to do with other issues—be it initial paid-up capital, rural branches, or role of the board and profile of the corporate entities. The central bank should be a strict gatekeeper but there shouldn’t be any room for discretion. If it finds 20 eligible candidates, all 20 should be given entry. Use of discretion at this stage is against the spirt of a free market, natural justice and the interest of the financial sector. Capping the supply is creating an artificial demand for banks. Whoever is found meeting the fit-and-proper criterion should be allowed to set up a bank.
Tamal Bandyopadhyay keeps a close eye on everything banking from his perch as Mint’s deputy managing editor in Mumbai. He is also the author of A Bank for the Buck, a book on HDFC Bank. Email your comments to firstname.lastname@example.org