The decade-long wait for new bank licences finally ended on Wednesday, with the Reserve Bank of India (RBI) deciding to issue permits to two of the 25 applicants. The ones to make the cut were IDFC, a diversified financial services firm with a special focus on infrastructure financing, and Bandhan, the country’s largest micro lender based in Kolkata. Industrial houses were again disappointed, as the central bank chose to ignore them.
A day after the Election Commission gave its clearance to grant of new licences, RBI’s committee of central board met to deliberate on the two names placed before it and decided to give its in-principle approval. RBI will also consider the application of India Post. But that will be done through a separate process in consultation with the government.
IDFC and Bandhan will get a year and a half to begin operations, failing which their licences could be cancelled.
“The ‘in-principle’ approval granted will be valid for 18 months, during which the applicants have to comply with the requirements under the guidelines and fulfil the other conditions as may be stipulated by the RBI,” the banking regulator said in a statement, adding that licences for commencement of banking operations will be given after the entities have fully complied with the norms. “Until a regular licence is issued, the applicants would be barred from doing banking business,” the RBI said.
The statement also said that some entities that did not qualify for a full-fledged banking licence in this round could again apply in future rounds or apply for differentiated licences under the proposed framework.
The process to issue bank licences was started in February 2010, after a Budget announcement by the then finance minister (now President) Pranab Mukherjee, with the objective of promoting financial inclusion. Three years later, the RBI released the final licensing guidelines in February 2013. The deadline for filing applications was July 1, 2013.
A total of 27 entities applied for licences. These included conglomerates like the Birlas, the Anil Ambani group, Larsen & Toubro and the Bajaj group, as well as non-banking financial companies like LIC Housing Finance and Edelweiss. Another micro lender, Janalakhsmi, had also applied. While the Tata group withdrew its application citing stringent norms that stipulated a non-operative financial holding company structure, Videocon Group-promoted Value Industries also dropped out.
The central bank’s decision to issue licences came despite stiff resistance from the country’s main Opposition party, the Bharatiya Janata Party, which had recently said the RBI should wait till the new government took charge after election results next month.
The RBI had set up a high-level advisory committee under former central bank governor Bimal Jalan to screen the 25 applications. According to the panel’s suggestion, the applicants that were under the glare of investigative agencies in connection with scams were dropped from contention.
In the previous round of licensing, two entities — Kotak and YES Bank — had been allowed to enter the banking sector in 2003-04.
The RBI has already said, from now, the issuance of bank licences will not be a once-in-a-decade affair. It will fine-tune the guidelines and licences will be given on tap. There will also be differentiated licensing for entities, like payment banks, which are different from universal banks.
Timeline on bank licensing in India:
1947-1969: Following a spate of mergers and amalgamations, the number of commercial banks in the country decreased from 640 in 1947 to 85 in 1969.
July, 1969: 14 major commercial banks were nationalised with the basic objective of ensuring credit flow to priority sectors of the economy.
April, 1980: Six more commercial banks were nationalised.
January, 1993: Reserve Bank of India (RBI) released guidelines for licensing of new banks in the private sector. 10 new banks were formed on the basis of these guidelines. These were Global Trust Bank, ICICI Bank, HDFC Bank, Axis Bank, Bank of Punjab, IndusInd Bank, Centurion Bank, IDBI Bank, Times Bank and Development Credit Bank.
January, 2001: RBI revised the guidelines for new bank licences. Two new banks – Kotak Mahindra Bank and YES Bank – were formed.
February 26, 2010: Former finance minister and now president Pranab Mukherjee announces in his budget speech (for 2010-11) that companies and business houses will be allowed to set up new banks.
August 11, 2010: RBI releases discussion paper on entry of new banks in the private sector.
December 23, 2010: RBI releases gist of comments from the feedback on the discussion paper.
August 29, 2011: RBI releases draft guidelines for licensing of new banks in the private sector.
July 10, 2012: RBI releases gist of comments from the feedback on the draft guidelines.
February 22, 2013: RBI releases guidelines for licensing of new banks.
July 1, 2013: Last date for submitting applications for new banking licence. RBI discloses names of 26 applicants for new banking licence – two of them drop out while one new player gets added to the list later.
September 4, 2013: RBI governor Raghuram Rajan announces setting up of a committee headed by Bimal Jalan to screen the applications.
November 1, 2013: Bimal Jalan committee holds its first meeting.
February 25, 2014: Bimal Jalan committee submits its report to RBI.
March 12, 2014: RBI seeks Election Commission's permission to issue in-principle approvals for banking licence.
April 1, 2014: Election Commission allows RBI to issue new bank licences.
April 2, 2014: RBI grants in-principle approval to IDFC and Bandhan Financial Services to set up banks. The in-principle approval will be valid for 18 months.