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Business News/ Opinion / Blogs/  How many new banks will get RBI’s nod?
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How many new banks will get RBI’s nod?

IDFC, LIC Housing Finance, Bandhan Financial Services, and Bajaj Finserv, seem to be the top picks of Jalan panel

Twenty-five companies have applied for licences but less than half a dozen may get Reserve Bank of India (RBI) clearance. Photo: Pradeep Gaur/Mint Premium
Twenty-five companies have applied for licences but less than half a dozen may get Reserve Bank of India (RBI) clearance. Photo: Pradeep Gaur/Mint

The Reserve Bank of India (RBI) seems ready to issue in-principle licences to a third set of new banks in the world’s tenth largest economy after it hears from the Election Commission (EC). Depending on the EC’s stance, it can happen as early as next week or post the April-May general election. In other words, the ball is now in the EC’s court. RBI has taken four years to complete the exercise. Former finance minister Pranab Mukherjee announced that a new set of private players would be allowed to set up banks in February 2010.

Twenty-five companies have applied for licences but less than half a dozen may get RBI clearance. Over the past few days, senior RBI officials have been brain-storming about who to give the nod to even as an expert committee headed by former RBI governor Bimal Jalan formalised its recommendations a few weeks back after several rounds of meetings. Former Securities and Exchange Board of India (Sebi) chairman C.B. Bhave, former RBI deputy governor Usha Thorat, and RBI board member Nachiket More were members of the Jalan panel.

If people familiar with the matter are to be believed, the Jalan panel has not recommended any entity for giving a licence to; instead, it has done a sort of Swot analysis of the 25 entities that have been in the fray. Under the panel’s scrutiny were the applicants and not the applications, since the regulator has made it clear that only those with impeccable track records will be considered for a licence and any investigation by a regulatory agency into any entity will disqualify such an entity. The candidates eligible to apply for a banking licence needed to have a 10-year track record and they should never have been under the scanner of any regulator, enforcement or investigative agencies. Most applicants faltered on this, while quite a few were unable to articulate their business plans well enough.

IDFC Ltd, LIC Housing Finance Ltd, Bandhan Financial Services Pvt. Ltd and Bajaj Finserv Ltd seem to be the top picks of the Jalan panel.

The panel seems to be in favour of India Post too but the government has not yet cleared the postal department’s plans for floating a bank. India Post may have to wait as RBI may open another window for the government agency, giving it the status of a public sector bank.

Among other applicants, L&T Finance Holdings Ltd may stand a chance.

I don’t know how many of these have actually got the central bank’s nod, but I will not be surprised if it says yes only to a couple of them at this stage—IDFC and Bandhan. Those who do not make it to the first list need not lose heart as RBI is set to offer banking licences on tap after fine-tuning the current licensing norms.

The list of serious applicants includes corporate houses such as Aditya Birla Nuvo Ltd and Reliance Capital Ltd; financial intermediaries Edelweiss Financial Services Ltd, IFCI Ltd, Indiabulls Housing Finance Ltd, India Infoline Ltd, JM Financial Ltd, Magma Fincorp Ltd, Muthoot Finance Ltd, Religare Enterprises Ltd, Shriram Capital Ltd and SREI Infrastructure Finance Ltd; microfinance institution Janalakshmi Financial Services Pvt. Ltd; and public sector undertaking Tourism Finance Corp of India Ltd. The Tatas opted out.

After receiving the in-principle licences, the successful applicants will have 18 months to finalise their business plans.

There has been at least one instance in the past where an in-principle licence was cancelled.

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

In the past, the apex bank’s stated objective behind giving licences to new banks had been to introduce competition in the banking sector, largely dominated by government-owned banks. However, this time, its objective is to bring about greater financial inclusion in a nation where only 35% of adults have access to formal banking services, according a 2012 World Bank working paper.

Three years after Mukherjee made the announcement in his February 2010 budget, RBI released the final guidelines on licensing norms in February 2013. The original idea was to open the sector only to private entities but the final norms allowed public sector entities to apply, provided they set up wholly-owned non-operative financial holding companies to own the bank. The deadline for submission of applications was 1 July 2013.

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 around it has been silent on how many new banks it wants in the system. It merely said the licences would 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.

Well after two decades of the first wave of bank nationalization, when RBI opened the doors for a set of new banks in January 1993, it received 113 applications, many from large industrial houses. Noted economist-bureaucrat Sharad Marathe, the first chairman of the erstwhile Industrial Development Bank of India, reviewed the first bunch in 1993. Many large industrial houses had applied for licences but only one was given—and that too in the guise of a group of non-resident Indian investors belonging to a particular community. Nine new banks were set up and one cooperative bank was allowed to convert itself into a commercial bank.

This list comprised: Global Trust Bank Ltd, ICICI Bank Ltd, HDFC Bank Ltd, UTI Bank Ltd (renamed Axis Bank Ltd), Bank of Punjab, IndusInd Bank Ltd, Centurion Bank Ltd, IDBI Bank Ltd, Times Bank and Development Credit Bank Ltd.

Of these, Times Bank was merged with HDFC Bank; Global Trust Bank was forced to merge with Oriental Bank of Commerce; and Bank of Punjab was acquired by Centurion Bank to form Centurion Bank of Punjab, which in turn was later taken over by HDFC Bank.

In January 2001, when RBI issued guidelines for the second set of new banks, a three-member committee comprising 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 regulator made it clear that no industrial house would be allowed to set up banks. Two licences were issued, including conversion of a non-banking finance company into a bank -- Kotak Mahindra Bank Ltd and Yes Bank Ltd.

In 1993, the capital requirement for new banks was 100 crore; in 2001, it was 200 crore, to be raised to 300 crore in three years. This time, it has been fixed at 500 crore.

In principle, RBI agreed to allow industrial houses to set up banks—expansion of banking services can be possible only if promoters have deep enough pockets to spend on technology and talent—even though it was not comfortable with the idea. A reluctant RBI first released a discussion paper in August 2010 and in August 2011, it issued the draft guidelines on new bank licensing, seeking public comments. The final guidelines were issued in February 2013.

Ahead of it, the government pushed through an amendment to banking laws in Parliament to strengthen the regulatory powers of RBI. The regulator has all along enjoyed the power to remove a director or any officer of a banking company but this was not adequate, if the entire board of directors worked against the interests of depositors and the bank. The government empowered RBI to supersede any bank board that acts in rogue fashion and appoint an administrator for managing the bank for up to one year.

Besides, RBI can also seek information from and inspect, if required, associated companies of the promoter of a bank.

Banker’s Trust Realtime is a frequent blog by Tamal Bandyopadhyay, who writes a popular weekly column Banker’s Trust.

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Published: 20 Mar 2014, 11:55 AM IST
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