The Reserve Bank of India (RBI) last week allowed any company to open a bank. But the list of conditions that come with this radical departure from established policy is long. The promoters’ business should not be misaligned with banking and it should not put the banking system at risk.
The minimum equity for a bank is Rs. 500 crore and companies intending to put up a part of this amount must have been financially sound for 10 years. The foreign shareholding should not exceed 49% in the first five years and new banks must list on the bourses within three years. The holding company should own at least 40% of the bank’s equity, which must be halved in 10 years. Holding firms will be governed by the RBI as credit companies.
At least half the directors of the holding companies should be independent of the founder groups and a fourth of all branches of the new banks must be in rural areas. Obviously, the central bank is seeking to cherry pick from among business houses and government-owned organisations. In the event, the Tatas, Birlas, Ambanis and Mahindras are understood to have shown interest.
Banking in India remains in acute short supply both in terms of the people it reaches and the amount of credit that passes through the system. Close to half the country’s population has no access to a bank. Indian households park less than half their savings in the financial system. And banks lend just over a half of the national income.
India is thus doing a lot of its business without banks. The Banking Regulation (Amendment) Bill, which was passed by the Lok Sabha in December, was a necessary first step to put the industry on a higher growth path. It empowered the banking regulator, the RBI, to look deeper into applications for new banks, intervene in the management of badly run ones and keep tabs on significant stake sales.
The RBI had made new bank licences conditional on being given a bigger regulatory stick. The Centre has been seeding much of the banking sector’s growth through taxpayer money, but a generation of private banks has established deep roots in the system through technological advances, modern management and a vastly improved customer experience. With an oversight mechanism in place, banking can now draw in fresh capital.
The bank licence rules reinforce a form of universal banking that India may have outgrown. Fresh thinking on the spread of banks in the country has stopped short of segmenting the market for credit.
Financial inclusion could be better served by sector-specific bank licences, where every new bank does not need to become a supermarket for financial products. State-controlled focused banking, like that for agriculture, has delivered mixed results. Private banks could bring in innovative new solutions.