You are using an older browser version. Please use a supported version for the best MSN experience.

Differentiated bank licence norms within four months

LiveMint logoLiveMint 29-05-2014 Asit Ranjan Mishra

New Delhi: The Reserve Bank of India (RBI) will finalize the guidelines for issuing differentiated banking licences within the next four months after which such licences will be issued on tap, financial services secretary Gurdial Singh Sandhu said on Thursday. The financial services department briefed new finance minister Arun Jaitley on the working agenda for the department.

“We are looking for differentiated banking licences such as payment banks, wholesale banks and retail banks. Government would like this to happen as soon as possible,” Sandhu said.

Wholesale banks will deal with larger institutions; retail banks will focus on individuals or smaller businesses; payment banks will help widen the spread of payment services and deposit products to small businesses and low-income households.

Shinjini Kumar, executive director at PricewaterhouseCoopers in charge of banking and capital markets, said increasing supply of banks through on-tap licensing and providing flexibility to innovate would help achieve the target of differentiated banking within the universal licensing framework.

RBI suggested in a discussion paper released in August 2013 that issuing licences to new banks should be a continuous rather than an intermittent process to make the sector more competitive. A gradual increase in the number of banks will also not strain the existing banking system in terms of business and human resources, which could be the case when permits are issued in bulk.

The new licences are being issued to widen the reach of the `84 trillion banking industry in an economy where, according to a 2012 World Bank document, only 35% of adults have access to formal banking services. The plan to license new banks was announced by then-finance minister Pranab Mukherjee in the 2010 budget.

RBI issued two banking licenses to IDFC Ltd and Bandhan Financial Services Pvt. Ltd of the 25 applicants in April. While IDFC is a diversified financial services firm with a special focus on infrastructure financing, Bandhan is the country’s largest microlender based in Kolkata.

A total of 25 entities were in the race for new banking licences. These included Reliance Capital Ltd, Bajaj Finserv Ltd, Aditya Birla Nuvo Ltd, L&T Finance Holdings Ltd, LIC Housing Finance Ltd, Muthoot Finance Ltd and India Post.

After the nationalization of banks in 1969, RBI first issued licences to private banks in 1993.

India’s largest private lender ICICI Bank Ltd and most valuable bank HDFC Bank Ltd were among the beneficiaries. The second set of licences was issued in 2004, when Yes Bank Ltd and Kotak Mahindra Bank Ltd were established. The third happened in April.

Sandhu said that public sector banks will also be asked to explore selling non-core assets and raise funds through capital markets.

Although there has been no specific directive to this effect, various government and RBI officials have been asking banks to dilute their holdings in non-core companies, where the lenders acted as seed capital providers.

The process will help banks unlock a considerable amount of capital at a time when the government is struggling to infuse equity into banks it owns. Capital in government banks has been eroding due to a surge in bad debt. Bad debt requires increased provisions, which eats into a bank’s profit and prevents reserve accumulation.

Though the issue of increasing foreign direct investment in insurance from 26% to 49% was discussed with Jaitley, no decision was taken, Sandhu said.

More From LiveMint

image beaconimage beaconimage beacon