Bank Licensing: Task Ahead for RBI

Finance Minister’s pronouncement for further banking license during the last budget speech marked a significant change in Indian banking sector-since last sixteen years, RBI has tried best to optimize the scale of reform in banking sector, by giving nod to UTI {now Axis Bank}for full fledged banking was the way forward in the direction of core competency.
Later entry of some more banks in 2004,enhanced the efficiency in Indian banking scenario-now the condition has changed significantly over the years as technological up-gradation have played very crucial role in meantime. Infusion of over Rs17, 000 crore on technologies since 1999 and relatively unscratched overcoming of Indian banking from global financial meltdown have paving the way for next level of transition under sound regulatory norms of RBI; so, time is opportune for banking in India to transform itself at the level of global standard.
Amidst the growing speculation, officials of RBI have in mind some basic inquisitions, like how many licenses should be issued? What should be the minimum capital requirement? Whether NBFCs should be allowed to convert into banks? Whether Industrial houses should be considered for granting banking license? Obviously for a year ahead, these concerns would cap the regulators like cloud though above all the same meticulousness and regulatory oversight will be the catalyst.
At initial level, RBI is going to post a draft guideline for both the general and expert comments by the end of July; afterwards the notice would be issued for application-in next and final stage, High Power Committee would review the applications and come out with their decisions-entire process will take at least a year.

Indeed, in all manners, RBI has to play pivotal role with its regulatory oversight-it must have to take into account the credibility of the promoter, that means no bank license for loan defaulters; RBI and Finance Ministry, both agreed on strict scrutiny of Books& Accounts ahead of issuing new licenses.
The second most imperative condition is business plan of prospective contenders, they must be asked for a long term plans of business with essential proposition to improve operations of banking Industry in India.
Anticipating the significance of a banking license in this country, contenders must have to demonstrate their vision in terms of enhancement and strengthening of banking business before and after their inclusion in banking sphere-only greed for profit sounds very unethical which hardly create incentive for the regulatory officials who have to play much larger task in terms of streamlining the financial inclusion and financial architecture of the country.

Moreover financial deepening should be and must be the priority task of India’s Central Bank {RBI}, as it forwardly entwined with the growth prospects of economy at this juncture, there wouldn’t be any denial for entry of sufficient new banks for improving the business outlook which despite making progress still lagging behind of actual turn around.
As per the RBI data, retail advances have grown from 10%to 20% of total advances, growth of return on assets from 0.4%to 1%, reduction in Non Performing Assets{NPA} from 6%to less then1%, fall in cost-income ratio from 67%to 44%-on the other side, from total 95 banks, we have 53,000 branch, only 40% people having bank accounts, 25.1 million no-frill accounts have opened in last two years-but they all hardly justified the actual potential of Indian banking which possess worth of 95%of India’s total GDP.

In 1994-95, RBI had issued 10 licenses for new banks, next time in 2003-04, numbers fallen down to merely two-with more applicants this time, RBI has flexible options to make sensible choices, absolutely number wouldn’t cross the double digit this time but its also unlikely that it would juggled beneath the five-six new licenses.
Level of capital requirements needs to be optimized as per the existing needs and better implication for banking business as it’s a crucial determinant of financial inclusion and growth. Some other issues, like granting fresh licenses rather conversion of NBFCs and retaining of RBI’s stand for not issuing the banking licenses to the industrial houses must remain intact as they don’t gives the broad view.

RBI can also contemplate to issue group licensing with limited voting rights of 10% as they would provide a diversified opportunity with group control-under present regulatory norms, especially on the wake of global recession, this could be another rational choice-there’s lot of room available for banking in India, as still around 70 million population is out of its purview, so it makes sense to tap these unexplored opportunity through introducing sufficient numbers of new banks as next course of action.
Atul Kumar Thakur
June 3, 2010, Thursday, New Delhi
atul-mdb@rediffmail.com