The Reserve Bank of India granted “in-principle” bank licences to Infrastructure Development Finance Co and microfinance lender Bandhan Financial Services Ltd, 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, ontap 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.
IDFC and Bandhan said the licences were an acknowledgement of their values.
These are the first licences to be awarded since 2003-04 when YES Bank got one and Kotak Mahindra Bank was allowed to convert itself into a bank from a finance company.
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.
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.
