A cautious beginning

The Reserve Bank of India’s in-principle approval to two applicants, IDFC Limited and Bandhan Financial Services Ltd., to set up banks comes four years after the then Finance Minister, Pranab

Mukherjee, in a budget speech mooted the idea of licensing a few private banks. By its own admission, the RBI’s approach to this round of bank licences has been conservative, a trait that is wholly appropriate in the present context. That the process has taken a long time before the first licences were approved merely underlines the complexities involved. A High Level Advisory Committee headed by former RBI Governor Bimal Jalan recommended these two applicants out of a list of 25 applications. All of them were earlier scrutinised by the RBI to ensure their eligibility under the guidelines issued in February 2013. It is noteworthy that none of the big corporate names that figured in the list made the grade. The RBI has neatly sidestepped what has been the most controversial aspect of the new licensing norms — permitting corporates to start banks. The Reserve Bank received a number of negative responses to this proposal from both the public at large and experts. Indeed, the RBI itself was opposed to it in the beginning, and it was the pressure from the Finance Ministry, among others, that made the central bank relent.

For the two successful applicants — both of them leading non-banking finance companies — getting the in-principle approval is only the first step. They have 18 months to comply with the requirements under the guidelines and fulfil other conditions that may be imposed. They will face daunting challenges to scale up to being universal banks and compete with existing institutions. Their existing strengths — infrastructure finance for IDFC, and microfinance for Bandhan — will no doubt help but, as the top officers of the two institutions admitted, there is a great deal of work to be done soon. Expectations from them are immense. The government’s rationale for new bank licences has been to extend the geographical coverage of organised finance and to promote financial literacy and inclusion. Sceptics of the new policy who wonder what the new banks will do that the existing players under all categories cannot do, need to be answered effectively by creating a viable, tech-savvy model that is also customer-friendly. They have to reward their shareholders who have enabled them to invest at least Rs.500 crore. The RBI Governor has said that after learning from the latest exercise, it might be possible to revise guidelines so that licences can be made available on tap. Be that as it may, it is obvious that the two successful applicants have just assumed additional responsibilities — of being role models.