Monday, the last day for the submission of applications for bank licences on Monday, saw a rush, not the anticipated stampede. Two decades ago, in 1993, when the Reserve Bank of India (RBI) opened doors to new banks for the first time, there were 113 applications. A decade later, in 2003, when applications for licences were sought a second time, there were around 100 applicants. This time, there are just 26. This, after it was reported that just about everyone was keen to enter the sector—banking, after all, is a lucrative business as it gives one access to cheap deposits. And 50% of India’s adult population does not have access to formal banking services.

What’s wrong with the Indian market?

Has banking lost its sheen in the world’s 10th largest economy with a young, vibrant middle class that has money to burn?

At least three foreign banks—UBS, Morgan Stanley and Goldman Sachs—got a banking licence in India after years of lobbying with the central bank, but all three have surrendered those licences.

The reasons behind the rather lukewarm response from local entities and the surrender of banking licences by foreign banks are different.

For all three foreign banks, commercial banking is not a critical part of their mainline operations across the globe. In the absence of a deep bond market, giving loans is 80% or more of banking in India and hence it is imperative to get into the business of taking deposits and giving loans if one wants to make it big. The three foreign banks had plans to try this out here but it did not make sense for them once they understood the implications of the statutory liquidity ratio or SLR (compulsory government bond-buying), cash reserve ratio or CRR (keeping a portion of deposits with the RBI) and priority sector loans (mandatory lending to farmers and small entrepreneurs).

Besides, one needs to make huge investments in the retail business and the returns on this take longer to materialise than in corporate banking. All these possibly weighed against the launch of commercial banking in India by these foreign banks. They will be here and continue to make money through bond syndication, derivatives and other corporate banking elements, but stay away from traditional commercial banking.

The notable absentees in the list of applicants for new banks are Mukesh Ambani’s Reliance group; Sunil Mittal’s Bharti group; the Mahindra group; and Sundaram Finance Ltd, a well known non-banking financial company (NBFC). Both Reliance and Bharti could have explored the synergy between what they do in the telecom space and banking to expand banking in India’s rural hinterland. RBI’s insistence on so-called financial inclusion—expanding banking service to the masses, the main mantra behind the issue of licences to a new set of banks—will make life difficult for many applicants should they get a banking licence.

These four and many others have stayed away as they have understood that it will not be easy to create value. Building a bank will require significant investment. Worse, promoters will need to get out faster than they were asked to in 1993 and 2003. Going by the licensing norms, the proposed new bank will have to be listed within three years and the promoters’ shareholding must come down to 40%. Within 10 years, the holding must be pared to 20%, and by the 12th year 15%. Finally, by floating a bank, big industrial houses will also expose themselves to RBI’s scrutiny. As a precondition to the licence, the central bank has said it will have the right to check the books of the industrial groups that will be allowed to set up banks. Many are not comfortable with that.

How many will get the licence? It’s anybody’s guess at this moment. In 1993, 10 entities were given licences (including a cooperative bank) and four of them did not survive. RBI also gave an in-principle nod to the CRB group (subsequently involved in a financial fraud) but cancelled it later. In 2003, two licences were given.

Economist-bureaucrat Sharad Marathe, the first chairman of the erstwhile Industrial Development Bank of India, scrutinized the first 113 applications. 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, screened the applications in 2003-04. RBI is yet to announce who will do the job this time around.

Even if it gives the nod to six applicants, that will roughly be one in four—something that has never happened before. In the first lot, the success rate was one in 11 and, in the second, one in 50.

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

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