Countdown begins for new bank licenses

Some applicants may have proposed or indicated their plans to take over or buy out some of the smaller banks in existence; or even have had 'secret' talks for mergers. If such offers are part of the applicant's ‘mission’ to improve and reach out to the rural areas, including extending service to the ‘urban poor’, they deserve serious consideration

Soon after the closing date for receipt of applications for new banking licenses, D Subbarao, the then governor of Reserve Bank of India (RBI), stated that "not all eligible applicants may get the license". At that time, in the first week of July, he did not want to specify the number of licenses that the RBI may issue by March 2014. The only difference, after Dr Raghuram Rajan succeeded him is that now, chances are, licenses may be issued as early as January and not in March 2014 as was indicated at that time.

There are 26 applicants in the running. All the applications are being scrutinized by an External Committee, consisting of Dr Bimal Jalan, the former RBI governor, and he is assisted by a team consisting of Usha Thorat (former deputy governor of RBI), CB Bhave (former chairman of SEBI) and Dr Nachiket Mor (former executive of ICICI Bank).

The proposal to allow establishment of new banks was mooted way back in 2010 and it has taken almost three years to prepare the very exacting requirements that applicants will have to fulfil for serious consideration. As a result, only 26 applications have been received, as against the 100s that were received when such an issue came up more than a decade ago.

With the revised rules, which are realistic and practical, industrial houses, corporate bodies and others could submit proposals, as long as the criteria laid down were met.

As a sequel, the leading contenders are Tata Sons, Reliance Capital, Aditya Birla Nuvo, Shriram Capital, Bajaj Finserv and L&T Finance. Others who are just as serious and have good track record are the Department of Post, IFCI, UAE Exchange, LIC Housing, IDFC and JM Financial and Muthoot Finance. This does not exclude others like Religare, Janalakshmi, Indiabulls etc, who have their own specialized knowledge in the field.

It may be recalled that critieria for consideration of the application covered the need to have a minimum paid up capital of Rs500 crore; sound financial track record for 10 years; willingness to open at least 25% of its branches in unbanked rural areas and be in a position to start operations within 18 months. Foreign capital, if infused, should not exceed 49%. If foreign capital came through actual foreign banks to operate in India, within the 49% stipulation, they may be allowed, as long as their home country extended reciprocity for Indian banks to set up their branches in their country.

Without any doubt, the large business houses named above are serious to secure the licenses. Others like the Department of Posts are so well entrenched in the country through their own net work of post offices, it will be a cake walk for them to be operative within months of their acquiring the required clearances and complying with the need to set up an "official' banking arm, which could be simply attached to their post offices, preceded by recruitment of qualified and experienced banking staff.

However, the Finance Ministry has some reservations in this matter.

It appears, after submitting their application for a banking license,

India Post sought financial assistance to the extent of Rs1,900 crore to set up the commercial banking operation, if they got the license. For this, the Finance Ministry, has suggested that they need to get the Expenditure Finance Committee's (EFC) approval. Therefore, it looks like the ministry has shown its reluctance in allowing India Post to get into banking business. So far, we have no news as to the reaction of EFC and whether they would fully support the venture.

The other candidate with substantial overseas experience and connections in financial operation covers the UAE Exchange. They began as money exchange in 1980, in the UAE (United Arab Emirates) and have build strong infrastructure with 328 branches in 20 states in the country. They have submitted strong plans to meet the increased branch requirements in five years after the license is received. If successful in obtaining the license, chances are that, later on, a local UAE bank may enter the scene as its partner! The bulk of the UAE Exchange business has been to handle expatriate Indian remittances to India from the Gulf countries, which runs into billions of dollars, each year.

Other applicants like IFCI, IDFC, LIC Housing, etc. too have financial experience and in operating in allied fields. Such conditions would apply to several others, who are also fellow applicants to get the banking license!

The point is that, this time, everyone of the applicants is well versed and has necessary credentials to set up a banking operation, given the opportunity. However, we are to recall that, the Raghuram Rajan Committee, in 2008 pointed out that "the Indian banking sector is fragmented and there are too many small uncompetitive players in the system".

This thought will take us to look at the prospect of RBI giving "conditional" licenses in 2014 to some of the applicants; in fact, we feel that this may be done in a phased manner!

We do not know what the applicants have stated in their "Mission Statement"! It is possible that there may be some who may have proposed, (or indicated) their plans to take over or buy out some of the smaller banks in existence; or even have had 'secret' talks for mergers! Who knows, there may be someone, who wants to buy out the several cooperative banks in the country, who are scattered all over the place!

If such offers are part of the applicant's "mission" to improve and reach out to the rural areas, including extending service to the "urban poor", they deserve serious consideration. How effectively and quickly these new licensees can replace the blood-sucking moneylenders in rural areas remains to be seen!