Differentiated licences suit some better: Rajan

Governor says some entities that didn't make it to the final list could be allowed to re-apply

The Reserve Bank of India (RBI) believes differentiated banking licences are more appropriate for some private entities aspiring to set up banks in India. Before granting in-principle approvals for banking licences to two companies, Bandhan Financial Services and IDFC, the banking regulator had assessed 25 applications.

“We went through the list of applicants. This was the set of applicants that the (Bimal) Jalan committee and RBI felt comfortable with. We have opened up the possibility that will allow applicants to apply again, once we start giving licences on-tap, as well as create differentiated banking licences. Some of the applicants will be better off applying for differentiated licences, rather than full-bank licences,” RBI Governor Raghuram Rajan said here on Friday.

The central bank said its decision to offer only two new licences after a gap of about a decade might be categorised “conservative”, but due to public concern about governance, it considered this the “most appropriate” stance.

Several large industrial houses — Reliance Group, Aditya Birla Group and Bajaj Group — and financial services companies such as L&T Finance Holdings, Shriram Capital and Muthoot Finance had applied for a banking licence.

RBI has kept the door to more licences open, saying it intends to use the learning from this round of licensing to revise the guidelines appropriately and move to giving licences more regularly. The central bank also plans to frame categories of differentiated bank licences, building on its discussion paper in this regard.

It said some of the entities that didn’t qualify for a full-fledged banking licence in this round could re-apply in the future.

In October 2007, RBI had prepared a discussion paper on differentiated bank licensing, in which it has said the case for these might be reviewed after a certain degree of success in financial inclusion was achieved and it was satisfied with the quality and robustness of the risk-management systems of the entire sector.

In a discussion paper on India’s banking structure (released in August 2013), the banking regulator had said banks had shown significant progress in financial inclusion and in improving the quality of risk management, but added a “lot more needs to be done”.

While the universal banking model remains the dominant one, countries such as the US, Australia, Singapore, Hong Kong and Indonesia grant differentiated banking licences.