Don't expect too many banks propping up immediately

Manojit Saha explains why RBI will remain 'conservative' in granting licences for payment banks and small banks

If you think the new guidelines on payment banks and small finance banks will result in mushrooming of banks immediately, think again. The banking regulator does not intend to do that, at least in the immediate future.

 

While releasing the final norms for niche banking activity – for the first time in history of Indian banking – Reserve Bank of India (RBI), has clearly stated its approach to the process. That approach will be ‘selective’ and not everyone who conforms the norms will get it.

 

“RBI will adopt a cautious approach in licensing payment/small finance banks in the initial years, and with experience gained, may suitably revise the approach,” the regulator said.

 

“Banking being a highly leveraged business, licences shall be issued on a very selective basis ...” it further said.

 

The differentiated bank licencing, has excited prospective entrants not only because it opens up new channel of business which was not present till date but also because the scope of activities haved been broadened as compared to those proposed in the draft norms released in July. These guidelines are also less stringent than that of universal bank norms.

 

The step is definitely a move in the right direction in a country where 90 per cent of all small businesses do not have access to formal finance and 60 per cent of citizens do not have functional bank accounts. More banks will certainly help to foster financial inclusion – a mission which both the government and the banking regulator is aiming to achieve.

 

However, the problem of exclusion will not be solved overnight. Because, the central bank will be again ‘conservative’ in its approach while vetting the application and awarding licence.

 

This has been the characteristic of the central bank when it granted universal bank licence earlier this year and even in the last couple of decades. 

 

“RBI’s approach in this round of bank licences could well be categorised as conservative. At a time when there is public concern about governance, and when it comes to licences for entities that are intimately trusted by the Indian public, this may well be the most appropriate stance,” the central bank said on April 2, 2014 while announcing IDFC and Bandhan has been awarded in-principle universal banking licence.

 

Earlier, following the 2001 bank licence norms, only 2 entities were given a bank licence. In 1991, when for the first time banking sector was opening up for private entities post the nationalisation of public sector banks, nine entities were given licence.