RBI gives in-principle approval to bank licences for IDFC, Bandhan

Mumbai: The Reserve Bank of India (RBI) on Wednesday gave in-principle approvals to infrastructure financier IDFC Ltd and microlender Bandhan Financial Services Pvt. Ltd to start new banks—only the third set of private sector lenders it would be licensing in two decades.

The approvals will be valid for 18 months, during which the two companies will have to comply with rules stipulated by RBI, the central bank said in a statement.

“On being satisfied that the applicants have complied with the requisite conditions laid down by the RBI as part of “in-principle” approval, they would be considered for grant of a licence for commencement of banking business under Section 22(1) of the Banking Regulation Act, 1949,” RBI said.

The new licences are being issued to widen the reach of the ₹ 84 trillion banking industry in an economy where, according to a 2012 World Bank document, only 35% of adults have access to formal banking services.The plan to license new banks was announced by then finance minister Pranab Mukherjee in the 2010 budget.

The last time RBI gave bank licences was 10 years ago— to Kotak Mahindra Bank Ltd and Yes Bank Ltd. The central bank licensed nine new banks and allowed one cooperative bank to convert itself into a commercial bank after opening the doors to new lenders in 1993.

Wednesday’s announcement came a day after RBI received the Election Commission’s nod to go ahead with the process of issuing new bank licences. The central bank consulted the commission after the electoral code of conduct came into effect on 5 March with the dates for the April-May general election being made public. Major policy announcements are discouraged when the code is in force.

RBI, which issued final guidelines on new bank licences in February 2013, said it was adopting a conservative approach in the current round of bank licensing.

“At a time when there is public concern about governance, and when it comes to licences for entities that are intimately trusted by the Indian public, this may well be the most appropriate stance,” it said.

Based in Kolkata, Bandhan is the largest microlender in India in terms of assets. As of 31 March 2014, Bandhan had a loan book of ₹ 6,200 crore and 5.4 million borrowers. The company has 13,000 employees and 2,016 branches operating in 22 states.

Bandhan, in which the World Bank arm International Finance Corporation has a stake of 10.93%, has a capital base of ₹ 1,100 crore.

“We will soon call a board meeting to decide the future course of action on setting up a bank,” said managing director Chandra Shekhar Ghosh. “We hope to set up the bank within a period of one year, for which some improvement in infrastructure is required.”

IDFC is an infrastructure finance company with a loan book of ₹ 54,552 crore at the end of December. IDFC had a net worth of ₹ 15,250 crore as of 31 December.

“Over the next 18 months, we will be looking to execute the plan that we had prepared in anticipation of getting a banking licence,” said Vikram Limaye, managing director and chief executive officer. “We have already said that we would like to diversify beyond infrastructure and now that we have got the banking licence, it helps our case.”

The government owns 17.24% of IDFC, followed by a unit of the Malaysian sovereign fund, Sipadan Investments (Mauritius) Ltd, which has a 9.97% stake. That apart, several financial institutions hold minority stakes in it.

A total of 25 entities were in the race for new banking licences. These included Reliance Capital Ltd, Bajaj Finserv Ltd, Aditya Birla Financial Services Group, L&T Finance Holdings Ltd, LIC Housing Finance Ltd, Muthoot Finance Ltd and India Post.

On Indian Post’s application, RBI said a high-level advisory committee had recommended that it consider the case “separately in consultation with the Government of India” and it had accepted the suggestion. The cabinet is yet to give the approval to India Post to go ahead with the banking plan.

A senior official at the department of posts welcomed the central bank’s stance on licences. “RBI has in principle given licence to India Post subject to the approval of the government,” the official said on condition of anonymity.

An Aditya Birla group spokesperson said the company will not like to comment on the issue. A Reliance Capital spokesperson too declined to comment. Bajaj Finserv, L&T Finance and LIC Housing Finance weren’t immediately available for comment.

Whether Muthoot Finance will apply again has to be decided by the board, said Padmakumar, executive director at the company. “We have to still meet and decide what we are going to do,” Padmakumar said.

RBI’s February guidelines require new banks to hold minimum capital of ₹ 500 crore. RBI has made it mandatory for new banks to open at least 25% of branches in rural centres.

They will also have to comply with the so-called priority sector lending norms under which 40% of the money loaned by banks has to go to segments such as agriculture, small businesses, retail traders, professionals and self-employed individuals.

“The process for a banking licence has reached its logical conclusion. RBI has played it safe by avoiding giving licences to companies in the first round because henceforth the licences are going to be on tap,” said Robin Roy, associate director, Pricewaterhousecoopers.

dinesh.n@livemint.com

Ami Shah, Madhura Karnik, Deepti Chaudhary contributed to this story.