Inclusion agenda: Is govt forcing RBI to issue more full service bank licences?

India will soon witness yet another round of new private banks after Bandhan and IDFC if the words of financial services secretary, G S Sandhu are anything to go by.

On Wednesday, Sandhu made a critical statement in Delhi. He said the Reserve Bank of India (RBI) will shortly invite applications to grant new licences in three categories - small banks, payments banks and universal banks to fulfil the financial inclusion objective of the government.

“Reserve Bank will shortly invite fresh applications to grant licence in three categories such as small banks, payment bank and universal bank to fulfil objectives of the government,” Sandhu said.

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The mention of small banks and payments banks is nothing new. The RBI has already announced draft rules for these two categories of banks stipulating the scope of their operations, capital requirements and the nature of ownership.

Payments banks are entities that accept small deposits and provide fund transfer services. Smaller banks are miniature of commercial banks, doing almost everything a commercial bank does but on a small scale.

But Sandhu’s comments on universal banking licence came as a surprise since the RBI hasn’t even finalised the contours of proposed on-tap licensing regime for universal banks. The term universal bank refers to full service commercial banks.

Interestingly, a top RBI official on condition of anonymity told Firstbiz, that the central bank is unlikely to come out with universal banking guidelines in the near future.

Typically, prior to giving licences to banks, the RBI follows a three-stage process. In the first stage, the apex bank comes with a discussion paper arguing the pros and cons of the proposal.

Secondly, it issues draft guidelines based on the feedback received for the discussion paper. Here the central bank gives out a detailed picture regarding the ownership, entry capital barrier and scope of operations of the proposed bank.

Finally, based on the comments received on the discussion paper, final guidelines inviting applications from interested parties are issued. In the latest round of bank permit issuance, the whole process took about four years before the central bank finalised its verdict.

In April, after four years of initiating the process, the RBI issued full service banking licences to two banks-IDFC and Bandhan-from a list of 25 aspirants.

In the case of payments banks and smaller banks, the RBI has issued draft rules. Hence the next logical step is final guidelines but that is not the case with universal banks.

To be sure, kicking off an on-tap or continuous bank licencing regime is part of the RBI’s larger framework of banking structure reforms but the central bank has not yet initiated the process of consultation with stakeholders for such a change in the licencing method.

On the contrary, if the central bank indeed issues guidelines for universal banks “soon”, then that would mean entry of fourth set of private sector banks in the country’s Rs 87 trillion banking system.

So far, the RBI has given entry to private banks in three rounds. The first was in 1993-94, when the RBI issued licences to 10 private sector banks, shortly after the nation embraced economic liberalisation under the P.V. Narasimha Rao government.

These were Global Trust Bank Ltd, ICICI Bank Ltd, HDFC Bank Ltd, Axis Bank Ltd, Bank of Punjab, IndusInd Bank Ltd, Centurion Bank, IDBI Bank Ltd, Times Bank and Development Credit Bank Ltd.

In 2003-04, the RBI issued licences to two more banks-Kotak Mahindra Bank Ltd and Yes Bank Ltd and in the third, in 2014, to two more banks-Bandhan and IDFC.

Sandhu’s announcement is yet another instance of the finance ministry undermining the operational autonomy of the RBI in matters pertaining to banking regulation.

If indeed what Sandhu said is true, i.e. if the RBI is set to unveil guidelines for universal banks “soon”, that will mark yet another instance, where the government does all the talking for major policy decisions in the banking sector and the RBI duly follows with required actions.

Remember, it was after Pranab Mukherjee, the then finance minister, announced in the union budget in February 2010 about the plan to issue new banking licences to business groups, the RBI was forced to initiate the process of issuing bank licences.

In fact until then, RBI was arguing for the need for consolidation in the banking sector.