The Draft Banking License Guidelines In India : An Evolving Landscape

Rbi
Background

 

India is among the faster growing economies in the world. However, as of 2010, India has more than 37% of its population of 1.35 billion living below poverty line. To ensure sustainable and inclusive economic growth, a deeper and wider availability of banking services is essential to provide the poor opportunities to build savings, make investments, avail credit and insure themselves against income shocks and emergencies.

 

Reserve Bank of India (RBI), therefore, has issued draft guidelines for new banking license recently. The RBI has sought views on these draft guidelines by October 31st following which process of inviting applications for setting up private sector banks will be initiated.

 

India has not issued a new banking license since 2004.

 

Interested New Entrants 

 

The draft guidelines have been more-or-less welcomed by experts. The guidelines would definitely have evinced interest from Tata Capital, Aditya Birla Group, Baja FinServ, Reliance Capital (ADAG), Raligare, M&M Financial Services, L&T Finance and Shriram Transport. Sundaram Finance doesn’t seem to be keen on applying for the license. IndiaBulls and Srei might miss out on the eligibility criteria owing to their dependence on the real estate/broking activities for income.

  

For Non Banking Finance Companies, whether to apply for a banking license is a tricky decision to make. First, they will have to merge their asset financing business with the bank. Second, if they convert to a bank, their return on assets (RoA) and return on equity (RoE) will slide, as returns for banks are lower than those of the NBFCs. For instance, have a look at this table.

 

Parameter

 

M&M Financial Services

 

The Best Private Bank

 
 

Return of Assets

 

4.5%

 

1.6%

 
 

Return on Equity

 

21%

 

20%

 
 

Interestingly, RBI might issue just 2-5 new licenses, and therefore many of the 10 odd corporate groups interested in setting up banks might be disappointed!

 

Challenges for New Entrants

  • With the new guidelines, cost of setting up a branch will
    go up, especially in the rural areas where gestation period is higher.
  • Maintaining Capital Adequacy Ratio of 12% for the first three years will be a bit difficult.
  • Condition that the new banks need to get listed within 2 years is tough too. Since the cost of setting up a bank is high and capital requirements are stringent, not many players will have much to show within 2 years of the license.

Impact On Existing Banks

 

The existing private sector banks like ICICI and HDFC are set to face increased pressure on margins due to competition. There is also a threat to their human resources, as many experienced employees might prefer moving on for better growth prospects with the new entrants.

 

How do you see the Indian banking landscape evolving with these developments? Do you see the new RBI draft guidelines appropriate, or are changes required? How many banking licenses should RBI look at issuing? Comments welcome!

 

References

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About Aman Sharma

Management Professional.
This entry was posted in Business, Economy, India and tagged , , , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink.

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