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Banking on new licences

New era: After 10 years the RBI has decided to issue licences to private companies again. With some of India's biggest corporate houses in fray, the race is hot. Mahua Venkatesh looks at the factors in play that are likely to decide the final winners.

india Updated: Jul 02, 2013 22:54 IST
Mahua Venkatesh
Mahua Venkatesh
Hindustan Times

Why has the Reserve Bank of India (RBI) suddenly decided to issue new bank licences to companies?
New banks are required to increase banking access, reach and penetration, while expanding geographic coverage. The financial inclusion programme, which seeks to bring every Indian household under the organised banking arm, would mean more banks have to come in the fray. Besides, increased participation from the private sector will mean more competition, which will ultimately benefit customers.

How many have applied?
Twenty six companies, private and public have applied for the licences.

When was the proposal of introducing new banks made?

President Pranab Mukherjee, who was the finance minister in 2010-11, had announced in his budget speech that new banks would be required to increase banking network in the country. At present, over 40% of Indians have no access to banking services.

When was the last time that the RBI issued bank licences?
It was 10 years ago in 2003-04. Yes Bank and Kotak Mahindra Bank got licences.

Why are RBI's guidelines on new licence so stringent that it almost discourages companies to apply?
Besides regulating the banking industry, the RBI is also responsible for framing India's monetary policies. It has to ensure that there is no conflict of interest when a company forays into banking. Companies wishing to enter the sector should also be financially sound since they would be handling people's money. The RBI, while framing the guidelines, studies 11 other economies to assess their banking sectors. Out of these, eight, including Singapore, Korea, Indonesia do not allow companies to bank. However, countries allow para-banking outfits with sound financials to foray into the sector. Countries such as the US, Japan and Canada that allow companies to get into banking have stringent rules on ownership. While in Japan, companies that have set up banks cannot have a stake not more than 5% in the bank, in Canada it is 10%.

Have banks in India failed in the past?
Yes, quite a few. Global Trust Bank, Times Bank are some of the examples. The RBI had to immediately intervene to merge them with other big banks to ensure that people's money was safe.

Is it the first time that private banks will be set up in India?
No. In fact, most public sector banks including the State Bank of India were private banks before being nationalised. The government nationalised the Imperial Bank of India in 1955, which later became SBI. The RBI took 60% stake in it. In April 1980, the government nationalised six more banks.

What was the reason behind nationalisation?
The government wanted to break the ownership and control of banks from a few business families. The move was also meant to prevent the concentration of wealth and economic power while mobilising savings and catering for the priority sectors.

When did the government embark on liberalization?
In the early 1990s. Several licenses were given for setting up private banks which came to be known as the new generation tech-savvy banks. Global Trust Bank, which failed was one of the first new generation banks to be set up. However, it was later amalgamated with Oriental Bank of Commerce. Besides GTB, UTI Bank, which was later renamed Axis Bank, ICICI Bank and HDFC Bank also got licences.

Is the central bank now open to having more foreign banks as well?
Yes, it is keen that foreign banks apply to enter India. A few had placed their proposals a couple of years ago.

Why is the RBI then again giving licenses to companies?
Today, the regulatory regime is strong and the banking industry in India is modern, sophisticated and well-equipped. It is ready for players to bring in healthier competition and increase penetration.

How many banks are there in India today?
India, the second-largest populated and one of the fastest growing economies in the world, has 26 public sector banks, over 20 private sector banks and several regional rural and co-operative banks. Besides, there are about 30 foreign banks operating in India.

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