Transforming bank licensing

Raghuram Rajan completes a revolution

As Governor Raghuram Rajan prepares to bid goodbye to the Reserve Bank of India (RBI), his relatively short stint will be remembered not the least for the way in which the granting of bank licences has been transformed. Almost two decades after the banking regulator had covered itself with mud when the CRB Capital Markets collapsed, after it had earlier been given an in-principle approval for a bank licence, the RBI has announced detailed guidelines putting on tap the issue of licences for setting up universal banks in the private sector. The historical significance of this journey from nadir to zenith, whereby opaque influence-driven granting of licences has been replaced by an open rule-based format of decision-making in as sensitive an area as the financial sector, needs underlining.

These rules come at the culmination of a process set in motion over three years ago with the issue, after a long break, of two licences for universal banks with the specific focus of promoting financial inclusion. This was followed by a whole set of licences to promote small finance banks and payments banks. It is significant that the focus of the three earlier licensing decisions, and also the declared purpose behind the latest norms that have put issuing of universal banking licences on tap, is financial inclusion.

Mr Rajan was clear in his mind that something needed to be done to deliver what bank nationalisation was meant to but could not - take financial service to the poor, who felt intimidated at the thought of going into a bank branch, and enable them to leverage themselves out of poverty by using low-cost technology. It has been a remarkable journey from the bottom up - from microfinance to small business to payments facilities as accessible as a village kirana store - and it has refuted the traditionally held notion that financial services are for those who have at least some personal financial wherewithal.

While it is good to have a clear set of rules, at first blush it seems that in trying to codify a highly complex process that has had to keep in sight a multitude of concerns and safeguards, the rules could end up being somewhat intimidating. The initial reaction from the non-banking financial companies (NBFC) which have been signalled to come forward, as opposed to large corporates who have been clearly asked to stay away, is that they will take a good bit of time to study all the rules and make up their minds. What is interesting is the open invitation to top banking professionals to come forward and promote banks for which, given their track record, they should have no difficulty securing the necessary finance. There is again an interesting parallel with the microfinance sector. Two leading MFIs, Ujjivan and Equitas, which have received small finance bank licences, have been promoted by professionals from the world of finance, who have had no difficulty in securing first angel and then private equity funding. They have thereafter closed highly successful public issues. At a time when the main headache for the global financial system is banks which are too big to fail and have had to be bailed out, Mr Rajan seems to want those who know the job to make a beginning from scratch. It is a pity that he will not be around to guide this experiment to get banking right by beginning again from ground zero.