The Reserve Bank of India granted "in-principle" bank licences to Infrastructure Development Finance Co and microfinance lender Bandhan Financial ServicesLtd, ending a four-year process that left many applicants including Reliance Capital and L&T Finance disappointed. But the regulator's promise of keeping a window open permanently for bank licences in future, rather than inviting applications at intervals, has kept their hopes alive.
India Post could still get a licence with the regulator saying it may issue one to the institution with the largest presence across the country after discussions with the government.
The announcement came after the Election Commission allowed the central bank to go ahead with the move. Finance Minister P Chidambaram had earlier said that he didn't think the move needed the poll watchdog's nod.
But the FM had nevertheless expressed his satisfaction that it had been cleared. "I am happy," he had said on Tuesday. Solidity and aspects such as financial inclusion marked RBI's choices.
Meanwhile, for applicants such as Shriram Capital, on-tap licensing may work better than the current process with its tough capital and regulatory conditions such as the mandatory merger of all lending activities. Among the reasons the exercise has taken time was the debate over whether corporate houses and entities with exposure to real estate should be given licences. In the event, such applicants didn't make the cut.
The in-principle approval is valid for 18 months during which IDFC and Bandhan will have to meet all RBI rules to secure a permanent licence and begin banking activities.
"RBI's approach in this round of bank licences could well be categorised as conservative," the central bank said in a statement. "At a time there is public concern about governance, and when it comes to licences for entities that are intimately trusted by the Indian public, this may well be the most appropriate stance."
Twenty-five applicants, including Reliance Capital backed by Anil Ambani and Aditya Birla Nuvo backed by the Aditya Birla Group, were among the applicants. The plan was first unveiled by then finance minister Pranab Mukherjee in the 2010-11 budget. The central bank had subsequently constituted a panel under former governor Bimal Jalan to shortlist candidates. "The point we want to make is the banking licence in this country is a measure of trust and you have to deserve that trust," RBI Governor Raghuram Rajan had told reporters on Tuesday.
"And we want to ensure that people who can build that trust get the opportunity to start a bank." IDFC and Bandhan said the licences were an ackno
wledgement of their values.
"This is a recognition for Bandhan's hard work in the field of financial inclusion," said Chandra Shekhar Ghosh, founder and chairman of Bandhan, the country's largest microfinance company by loans. "It is also a recognition of the microfinance sector as a whole."
These are the first licences to be awarded since 2003-04 when YES Bank got one andKotak Mahindra Bank was allowed to convert itself into a bank from a finance company.
"Directionally, there are enough indications that we are moving to on-tap licensing regime," said Shinjini Kumar, leader (banking and capital markets) at consultants PwC.
"One of the challenges with the existing licensing regime is that regulatory opportunity determines market entry rather than business need and preparedness of applicants. One would hope that licensing of these two banks is just the start." Although the new banks are unlikely to be much of a threat to any of the existing lenders, making licensing a continuous process may make the industry more vibrant.
"It is always good to do something, than nothing at all," said Saurabh Tripathi, leader (financial institutions practice), The Boston Consulting Group. "It will still create certain energy in the system and make people think about innovative models." The two companies granted licences are from diverse fields.
IDFC funds big-ticket projects such as power plants and roads while Bandhan lends small amounts to the poor.
Both these companies were seeking a licence because a bank has access to lower cost deposits in the form of savings and current accounts. A finance company has to borrow from banks, or sell bonds to raise funds, forcing them to charge more from borrowers. Becoming a bank by itself may not resolve such issues. YES Bank and Kotak have been battling to boost deposits amid stiff competition.
Furthermore, for IDFC, there could be issues on priority sector lending, which includes credit to agriculture and small businesses. "There are various things that need to be done, which are structure, HR, technology related," said Vikram Limaye, IDFC chief executive.
"We have one year after 18 months to meet priority sector lending norms. We will start working on it in the interim period. We have a capital adequacy ratio of 21% so we don't need to raise any capital."
One of the unsuccessful applicants said it hadn't given up on its aspirations and would examine RBI's plan for specialist banking licences when it's ready.
"This is just the beginning," said Nirmal Jain of IIFL. "It looks like RBI will give out licences more frequently and not after a gap of 10 years. Once the guidelines are out on differentiated banking licences, we can evaluate the prospects."
India Post could still get a licence with the regulator saying it may issue one to the institution with the largest presence across the country after discussions with the government.
The announcement came after the Election Commission allowed the central bank to go ahead with the move. Finance Minister P Chidambaram had earlier said that he didn't think the move needed the poll watchdog's nod.
But the FM had nevertheless expressed his satisfaction that it had been cleared. "I am happy," he had said on Tuesday. Solidity and aspects such as financial inclusion marked RBI's choices.
Meanwhile, for applicants such as Shriram Capital, on-tap licensing may work better than the current process with its tough capital and regulatory conditions such as the mandatory merger of all lending activities. Among the reasons the exercise has taken time was the debate over whether corporate houses and entities with exposure to real estate should be given licences. In the event, such applicants didn't make the cut.
The in-principle approval is valid for 18 months during which IDFC and Bandhan will have to meet all RBI rules to secure a permanent licence and begin banking activities.
"RBI's approach in this round of bank licences could well be categorised as conservative," the central bank said in a statement. "At a time there is public concern about governance, and when it comes to licences for entities that are intimately trusted by the Indian public, this may well be the most appropriate stance."
Twenty-five applicants, including Reliance Capital backed by Anil Ambani and Aditya Birla Nuvo backed by the Aditya Birla Group, were among the applicants. The plan was first unveiled by then finance minister Pranab Mukherjee in the 2010-11 budget. The central bank had subsequently constituted a panel under former governor Bimal Jalan to shortlist candidates. "The point we want to make is the banking licence in this country is a measure of trust and you have to deserve that trust," RBI Governor Raghuram Rajan had told reporters on Tuesday.
"And we want to ensure that people who can build that trust get the opportunity to start a bank." IDFC and Bandhan said the licences were an ackno
wledgement of their values. "This is a recognition for Bandhan's hard work in the field of financial inclusion," said Chandra Shekhar Ghosh, founder and chairman of Bandhan, the country's largest microfinance company by loans. "It is also a recognition of the microfinance sector as a whole."
These are the first licences to be awarded since 2003-04 when YES Bank got one andKotak Mahindra Bank was allowed to convert itself into a bank from a finance company.
"Directionally, there are enough indications that we are moving to on-tap licensing regime," said Shinjini Kumar, leader (banking and capital markets) at consultants PwC.
"One of the challenges with the existing licensing regime is that regulatory opportunity determines market entry rather than business need and preparedness of applicants. One would hope that licensing of these two banks is just the start." Although the new banks are unlikely to be much of a threat to any of the existing lenders, making licensing a continuous process may make the industry more vibrant.
"It is always good to do something, than nothing at all," said Saurabh Tripathi, leader (financial institutions practice), The Boston Consulting Group. "It will still create certain energy in the system and make people think about innovative models." The two companies granted licences are from diverse fields.
IDFC funds big-ticket projects such as power plants and roads while Bandhan lends small amounts to the poor.
Both these companies were seeking a licence because a bank has access to lower cost deposits in the form of savings and current accounts. A finance company has to borrow from banks, or sell bonds to raise funds, forcing them to charge more from borrowers. Becoming a bank by itself may not resolve such issues. YES Bank and Kotak have been battling to boost deposits amid stiff competition.
Furthermore, for IDFC, there could be issues on priority sector lending, which includes credit to agriculture and small businesses. "There are various things that need to be done, which are structure, HR, technology related," said Vikram Limaye, IDFC chief executive.
"We have one year after 18 months to meet priority sector lending norms. We will start working on it in the interim period. We have a capital adequacy ratio of 21% so we don't need to raise any capital."
One of the unsuccessful applicants said it hadn't given up on its aspirations and would examine RBI's plan for specialist banking licences when it's ready.
"This is just the beginning," said Nirmal Jain of IIFL. "It looks like RBI will give out licences more frequently and not after a gap of 10 years. Once the guidelines are out on differentiated banking licences, we can evaluate the prospects."
Source:-The Economic Times
