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The markets cheered the passage of the Banking Laws (Amendment) Bill on 18 December, which gave more powers to the Reserve Bank of India to regulate the banks, and paved the way for the issuance of licences by the regulator. RBI Governor Duvvuri Subbarao had made it clear that having additional powers, like superseding bank boards and inspecting books of banks' non-bank subsidiaries and joint ventures, was a prerequisite for allowing new entrants. Subbarao wanted to see the revised law even before the final norms were laid out.
The markets became euphoric after the bill was passed by the Lok Sabha (it was later passed by Rajya Sabha also); the stock prices of prospective entrants rose sharply.
"Effectively, the pre-conditions that RBI had set for new bank licences appear to have been almost met. And the RBI should be embarking on the process of issuing final guidelines, seeking applications, and after due process, issuing new licences," Citigroup said in a note to its clients that expects the law to be enacted soon.
That the central bank will consider new entrants, including non banking financial companies (NBFCs) and industrial houses, was announced by the then finance minister Pranab Mukherjee in his budget speech in February 2010. In response to the minister's statement, the RBI first released a discussion paper in August 2010 and then took one more year to issue the draft guidelines in August 2011. Since then, a gist of the comments on the draft norms was released by the RBI.
Given the pace at which the RBI has approached the issue, said prospective entrants, it is unlikely that a new banking entity will start operations any time soon. After winning RBI approval, an entity will take at least six to eight months to open a branch.
According to central banking sources, after the final norms are released (it is still not clear when the final guidelines will be announced) and the RBI starts the process of inviting applications, it will form a couple of committees - including an external committee - to vet the applications. This external committee will take its time to decide which candidate's application to forward. The markets expect the RBI to take anywhere between six and 12 months to scrutinise the licences, and after the licences are awarded, new banks will be directed to begin their roll-outs in 12 months.
G S Sundararajan, group director, Shriram group - an entity which is keen on entering banking - expects that while the final guidelines are expected in January, it may take the RBI one more year to grant the licences.
"The first set of licenses may be issued by the first quarter of 2014 (i.e., January-March)," Sundararajan said. He expects the central bank to issue three or four licences initially.
The RBI is expected to give a one-year time frame to the entity after awarding the licence, to open the first branch. Banking aspirants said that a full-fledged branch, having core banking solutions, could be opened within six to eight months from the date of receiving a licence.
Most importantly, the term of Anand Sinha - the RBI deputy governor overseeing the issuance of new licences - ends in February 2013, when he attains the age of 62, the retirement age for deputy governors. Though the RBI has requested the government to make an exception and extend his tenure by one year, it is not clear if the government will agree. If it doesn't, whoever comes in as deputy governor will take time to settle down.
While experts and the government have strongly pitched for newer players, central banking sources indicate that the RBI will not do things in a hurry.
"The advent of new private sector banks (the first set of licences was issued in 1993) has been amongst the most successful set of reforms in India. The new private sector banks collectively have materially changed the face of Indian banking - in customer service, technology, expanding reach, and have in the process created immense shareholder value too," the Citigroup note said.
While the main objective of the new banking licences is to expedite financial inclusion, as articulated by the finance minister during the budget presentation in 2010, the industry expects that the RBI will not stop after issuing the first set of licences and the process will be a continuous one.
"We expect RBI to issue three to four licences in the first phase. What is more important with the process this time around is that it is likely to be a continuous process. Unlike earlier, where RBI issued licences at one step and then stopped, this time we expect that as and when more applications are received, those will be considered. Since the government's and the regulator's main objective is to drive financial inclusion through new banks, I think this could only be done if the licences process becomes continuous and the regulator does not stop after issuing them in the first phase. The window will not be a short one," Sundararajan said.
It is to be seen if the RBI considers that the yet-to-be-released final norms should stay relevant for a few years and invites fresh applications from time to time. What is clear, however, is that the central bank will be cautious in its approach in opening up the sector to industrial houses.
