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Entry barriers for banking licence in India are high… very high

It is also not clear what it takes to get a bank licence in India. In the recent list of rejections, not much is said about why the applications are rejected 

May 24, 2022 / 09:54 AM IST
Source: Shutterstock

Source: Shutterstock

Sanjiv Bajaj, Chairman and Managing Director of Bajaj Finserv, was recently appointed as the new President of the CII (Confederation of Indian Industries). After his appointment, Bajaj remarked that ‘Aatmanirbhar Bharat first needs Aatmanirbhar banking sector’.

Bajaj noted that the banking sector needs to expand not just for financial inclusion, but also finance large companies in becoming globally competitive. He added that while the Reserve Bank of India (RBI) has defined who will be allowed to get a banking licence, there are many strong non-banking financial companies (NBFCs) which have built capabilities over the long term, and could be encouraged to move towards a bank licence. Even before his CII stint, Bajaj had been vocal on the need to expand banking services, and granting banking licence to large NBFCs.

In an interesting set of ironies, as Bajaj was making these suggestions to open banking to new players, the banking regulator was doing the opposite. The RBI rejected four applications for universal banks and two for small finance banks (SFBs). Of the four applications for universal banks, two were NBFCs, one was a co-operative bank, and one was from group of individuals led by former Citibank executive Pankaj Vaish. Of the two SFB applications, one was a technology company, and another was a co-operative bank.

In an earlier article, I had hoped that 2022 will herald granting of new bank licences. In 2016, the RBI allowed the grant of universal bank licenses under an on-tap basis, and extended it to small finance banks in 2019. In March 2021, the central bank formed an advisory committee to evaluate applications for bank licenses. That April it received four applications for universal banks, and four small finance banks. The RBI received a total of three applications for small finance banks in rest of 2021.

Now, all the four universal bank applications have been rejected, and two out of seven SFB applications have been rejected. We have to wait and watch what the advisory committee has to say on the remaining five SFB applications.

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Despite the appeal by Bajaj and several other corporates, the entry barriers for getting a bank licence in India remains a very high. The Government of India and the RBI decided to open the banking sector to new banks as part of the 1991 reforms. In 1993, the RBI received 143 applications for establishing new banks, of which 23 were deemed worthy, and finally 10 banks saw the light of the day. In 2013, the RBI received 26 applications, of which only two were given universal bank licences.

It is also not clear what it takes to get a bank licence in India.

In its recent list of rejections, not much is said about why the applications are rejected. All the RBI press release mentions is: “Based on the assessment of the applications, following applicants were not found suitable for granting of in-principle approval to set up banks”. The RBI has developed a fit and proper criteria for granting bank licences, and the four applicants would not have met the criteria. It is just that some explanation would have helped better understand the reasons for not finding them suitable.

Going back to Bajaj’s proposal on establishing new banks: how, and from where do we get the capital to establish them? Currently, the minimum capital requirement for a new universal bank has been increased from Rs 500 crore to Rs 1,000 crore, and for an SFB, the minimum capital requirement has increased from Rs 200 crore to Rs 300 crore. Given these capital requirements, and banks being subject to multiple regulations, only selected entities can be deemed fit to even apply for bank licences in India.

Recent discussions have hovered around three possible entities for awarding new bank licences: allowing corporates to own banks, allowing large NBFCs to convert into banks, and allowing foreign banks. The first choice has been highly-controversial, and has been ruled out by most experts given concerns around corporate-owned banks lending to themselves. The second choice looks obvious, but we have not seen much action on this front. Part of the reason is that the few NBFCs which wish to convert into banks are owned by corporates, as the Bajaj group owns Bajaj FinServ.

Given the lack of domestic sources, Indian banking should have been more open to foreign banks in India. But this channel has not really developed on expected lines. Most of the foreign banks have found it difficult to function in India given multiple lending requirements. The 2008 crisis also cast a long shadow over the role of foreign banks in domestic economies. In fact, we are actually seeing foreign banks such as Citibank exiting retail banking from India.

To sum up, CII President Bajaj’s suggestion is welcome, and much needed. However, the current policy, and limited choices of compliant entities does not give much hope. As of now, Bajaj’s hope of converting the iconic slogan of ‘humara bajaj’ to ‘humara bank’ remains a distant dream.

Amol Agrawal is faculty at Ahmedabad University.

Views are personal and do not represent the stand of this publication.
Amol Agrawal is faculty at Ahmedabad University.
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