RBI New Banking Licences

8/12/2019 RBI New Banking Licences

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RBI: New

bankinglicenses

policy in India


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RBI: New banking licenses policy in India

The last few years have seen a spate of alternative banking channels replacing traditional

brick and mortar structures, thereby reducing branch dependency and lowering fixed costs

and overheads. IT innovation in the banking sector has resulted in automated transaction

processing, streamlined operations, and fewer errors on account of minimal human

intervention. Also, with focused and seamlessly integrated multi-channel support, banks

today aim for improved customer service and enhanced productivity and profitability. They

also strive for financial inclusion, introducing Smart cards supported by !S devices and

online" offline connectivity. #ollaborative models with telecom companies, such as Airtel $

for Airtel %oney $are opening up new vistas.

Adding a new branch to a bank&s network is an expensive proposition re'uiring a great deal

of thought and analysis. This paper provides a deep dive analysis on the (eserve bank of

India )(*I+ licensing policy for new *anks and its impact.

India&s banking ecosystem is constituted by different *anks"inancial institutions catering to

the needs of different industry and consumer segments. The banking industry of the country

controlled by (eserve *ank of India, A*A( and other regulators had contributed to the

economic growth of the country.

/hile analy0ing the concentration of *anks in India, the urban areas are dominated by ublic

Sector, rivate and oreign *anks while semi-urban areas are served by the ublic Sector

and (ural (egional *anks )((*+ in addition to #o-operative *anks. *anking presence is

minimal in rural areas with a few #o-operative *anks and ((*s. There are still unbanked

areas in the rural segment.

Rural scenario

igures from the 1233 census indicate that out of 3.13 billion Indians, 455 million live in

villages and 566 million in cities7 rural areas account for nearly 628 of the total population.

!ccupation in these areas include agriculture, dairy farming, small cottage industries etc. A

study by ricewaterhouse#oopers observes that this section of the Indian population is

largely unbanked and that it is essential to leverage technology to reach it. According to facts

and figures thrown up by this study, only 568 of Scheduled #ommercial *ank branches

operate in rural areas with a dismal 928 of the population holding bank accounts. Statistics


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also indicate that banking reaches only 568 of the population while mobile phone

penetration is higher at :28. There is 3 bank branch and AT% for every 32,222 people .!n

the other hand, penetration of mobile phones is :322 per 32,222.

Some more figures from a /orld *ank study depicting the average population holding

accounts with formal financial institutions;

RegionPercentage

(Approx.)

/orldwide :28

eveloping

=reater %umbai )population 31.: million+ alone accounted for 118 of total

deposits and 1:8 of total credit in ? 1232-33.

> The top six centres namely, =reater %umbai, elhi, #hennai, @olkatta, *angalore

and hyderabad together accounted for 98 of total deposits and :8 of total

credit in 1232-33.

> A geographical distribution showed that 3"5 of the total credit as of %arch 1233

was from the western region.

> A population-wise distribution indicated that of the total credit as of %arch 1233,

48 was from the metropolitan region, B8 from semi-urban areas, and 8 from

rural areas.


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Deposits

According to data from the %c@insey Survey, CIndia *anking !verviewD, from 122

onward, 28 of all savings deposits belong to 168 of the urban population $ a stark

indication of the need for financial inclusion in rural India.

!nly about 968 of the total savings is accessed by the financial sector )122:+, which means

that a maEority is outside the banking channel for want of banking reach and"or confidence.

This is a maEor contributor to Cblack moneyD in the financial system.

The tendency in rural and semi-urban areas is to hoard cash, gold, silver etc. at home,

increasing the risk of theft. Also, idle money leads to loss of income for an individual and

adversely impacts the country&s economic growth, resulting in a vicious cycle.

#ountry

=

#ontribution

8

#hina .:

FSA :.5

India :.3

F@ 9.4

%alaysia 1.

Thailand 1.:

espite the bleak outlook, the contribution of our banking sector to = has been in line

with other developed countries )data 122:+.

A brief analysis of the above ;

> Ample scope for penetration of *anking in the Tier 1 G other centres in India

> Hast potential to bring a maEor chunk of the population under the organi0ed

banking sector

>


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> #ost of intermediation can undergo a substantial reduction due to increased

penetration G economies of scale

As part of (*I measures to take banking to rural areas, the financial inclusion model was

commissioned almost 1 decades ago. owever the (*I has come to realise that *usiness

#orrespondents )*#s+ alone cannot drive financial inclusion and that rural customers need

the confidence and reassuarance of a bank branch.

#ertain measures need to be taken to;

> *uild confidence in the safety of the banking system.

>


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Issue o& New Banking licences by t'e RBI

(n'ance#ent o& rural penetrationIssuance of licenses on the condition that the bank will open at least 1:8 of its branches in

rural areas is a good way to strengthen banking services in those places. Fse of technology

and modern infrastructural facilities in addition to core banking solutions and various

delivery channels will help improve customer service. /hile healthy competition among

banks can be good for the customer in terms of products and services, it can prove

counterproductive for banks, making some branches unviable.

The following is a data snapshot for some top-ranked public and private sector banks for a

better insight into the Indian banking scene;

Statistics; .?. 1231

)D%*

Bank

I*I*I

Bank

Axis PNB $BI

eposits *ase

)I( *illion+ 1,96.2 1,:::.31 1,123.29 5,6B:.44 32,95.96

Advances *ase

)I( *illion+ 3,B:9.12 1,:56.14 3,B6.2 1,B56.6: 4,6:.6B

et Interest

%argin 9.118 1.658 5.:B8 5.49 5.4:8

*ranches 1,:99 1,6:1 3,11 )including :,:4 392B6

AT% 4,B35 B,22 B,B19 ,22B 11,393 $ for

S*I


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=ross A 3.228 2.1 -2.1:8 1.B5 8

)3.:18+

9.998

)3.418+

)et A+ -2.348

(!A 3.668 3.:28 3.48 3.3B8 2.448


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increasing domestic competition in banking over the medium to long term scenario. however

further reforms are needed to facilitate infrastructure development and encourage much

higher levels of corporate investment. The potential of the Indian market makes it extremely

attractive for international banks but given the challenges that remain, the benefits of

investments may only be reali0ed over a long period.D

=iven the country&s population of over 3.13 billion, there is ample scope for entry of new

banks. ue precaution taken by the (*I before giving ew *anking Jicenses )*J+ can

avert an %GA situation.

Potential #isuse o& low,cost &unds by industrial 'ouses wit' banking licenses

The (*I has in place ample checks to restrict fund diversion by industrial houses with bank

licenses. The legal structure of all financial services entities of the promoter, board

composition, financial sector experience of the top management, voting rights, shareholding

restrictions, maximum cap on I"(I"II holdings, transparency in source of e'uity,

realistic and viable business plans are some of the key aspects that the (*I would be looking

into.

%andatory listing of new banks within three years as proposed by (*I draft guidelines will

ensure that they are under the purview of both the (*I and Se*I )Security and exchanges

*oard of India+ for that duration.

The promoter or holding company should contribute a minimum of 928 of the total e'uity,

to be locked in for five years. ew banks will also have to maintain a minimum #apital

Ade'uacy (atio )#A(+ of 358 for the first three years. eedback from various agencies

such as the Income Tax epartment and enforcement irectorate is re'uired before

sanctioning licenses.

In addition, checks through core banking solution implementation and disciplinary and

penal action in case of breach of conditions will go a long way in safeguarding public

interest.

or effective procedural implementation of new license issuance, the (*I intends to appoint

a high-level advisory committee comprising individuals with vast experience in the banking

and financial services sector, who in turn will ensure that licenses are given to industrial


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houses with valid credentials and the right motives. The emphasis here would be on the

profile of the aspirants and their background, ensuring that their business culture is aligned to

that of a bank7 that they carry sound credentials7 and hold an impressive track record in their

line of business. *esides, these new banks would need

to list within three years and the banks& boards should have independent directors.

urthermore, the (*I has sought powers to dissolve banks in the event of severe violations,

thereby putting public interest above all else.

ew banks, with large corporate houses at their helm, will bring to the table their vast

expertise and infuse freshness and innovation into this sector, while complying with the

(*I norms.

In a nutshell, collective, mass banking is the way forward for the larger good. *anks,

software and technology sectors, services industry comprising auditing firms, trade and

commerce at large and the general public, all stand to gain from this. Increased deposits and

credit growth in addition to availability of low-cost funds would have a positive impact on

the country&s economy.


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*onclusion


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(eferences

1.articles.economictimes.indiatimes. com"1233-26-3:"news"1B666B:9K3K rural-areas-

urban-areas-census-report

2. thecalibre.in"in-depth-current-affairs" rbi-sets-up-panel-on-financial inclusion"321231"L

pM36:2

3.www.rbi.org.in"scripts"Annual(eport ublications.aspxLIdM3254

4 www.marketwatch.com"story" china-construction-bank-profit-beats-forecasts-1231-32-14

5.http;""www.mckinsey.com"

6./ebsite of respective banks, Indian *anking Association, (*I, database and multiple

reports along with (*I (eport on Trend and rogress of *anking in India 1232-33

7.Times ews etwork

8.The economic Times

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