Bank licences on-tap : RBI's Rajan just poured cold water on dreams of corporate biggies
On-tap banking licence will be the third leg of structural reforms in the banking sector
Bank licensing will no longer be a once-in-a-decade affair with the Reserve Bank of India (RBI) now gearing up to make ‘on-tap’ licensing a reality. The central bank, under Raghuram Rajan, kicked off the differentiated banking regime (banks dedicated to cater to different category customers) when he paved the way for payments banks and small finance banks in 2015.
Now, with universal bank licences (full service commercial banks) too proposed to be on-tap, the Indian baking sector has initiated the third leg of structural reforms in the banking sector after the nationalisation era and later letting entry to the private sector banks in the early 90s.
But, the big highlight of the draft paper, for which comments have been sought until 30 June, is that big corporations are out of the race.
The RBI clearly spells out this in the draft paper. “Large industrial/business houses are excluded as eligible entities but permitted to invest in the banks to the extent of less than 10 per cent,” the RBI says. This pours cold water on the plans of corporate tycoons, who wants their ‘own’ bank.
The central bank’s move is understandable since it has never favoured big corporations setting up banks and has sought since banks primarily deal with public money. Hence, the RBI doesn’t want to take chances of private corporations misusing that money for related party lending. But, the central bank is okay with business houses investing up to 10 per cent in the new banks. The question here is can RBI ensure a few corporations do not act in concert to take indirect control of a bank.
The RBI is okay with the existing non-banking financial companies (NBFCs) that are ‘controlled by residents’ and have a successful track record for at least 10 years applying for a licence. So are individuals / professionals who are ‘residents’ and have 10 years of experience in banking and finance.
Also, private groups that are ‘owned and controlled by residents’ and have a successful track record for at least 10 years. Such entities, if they have total assets of Rs 5,000 crore or more, the non-financial business of the group does not account for 40 per cent or more in terms of total income, the RBI has said in the draft. The minimum entry capital set is Rs 500 crore.
In short, the RBI primarily wants good NBFCs convert to full-service banks. A private group can apply if it is primarily into financial services business with good track record of a decade. The stringent norms would mean that only very few eligible candidates can throw their hat in the ring. Not surprising since the central bank always had an aversion to corporations setting up banks.
In the last round, from the 25 candidates applied for full service bank licences, only two got the final permit — IDFC and Bandhan. The others too can try their luck once the new regulation comes into place.
For the yet-to-be banked in the hinterland of the country, this is good news since more banks would mean more competition, more reach that would lower the cost of services. The RBI has made it clear that new banks under the ‘on-tap’ licensing mode cannot ignore the rural areas of the country by stipulating that at least 25 per cent of their branches should be in unbanked rural centres (population up to 9,999 as per the latest census) and they shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic scheduled commercial banks.
Under the priority sector lending rules, a bank needs to lend at least 40 per cent of their loans to economically weaker sections. Financial inclusion has been a big challenge for Indian banking sector even after decades of bank nationalization. The new set of universal banks and the small finance, payments banks will change this scene. But, all depends on how many licences the central bank chooses to give. But, as mentioned earlier, the big takeaway is that corporate biggies should no longer dream of owning a full service commercial bank.
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In the weeks to come, you will see a fulfilment of our past announcements, Rajan said
Rajan said implementation of several reforms would be key to ensuring India posts high growth