Licensing for competition

Following the Election Commission’s nod, the Reserve Bank of India (RBI) has set the ball rolling on new banking licences by granting ‘in principle’ approval to two applicants — IDFC and Bandhan Financial Services. But what is really refreshing is the RBI’s overall approach to the licensing issue, which is novel. Unlike in the past, which saw 10 licences being awarded in 1993 and another three in 2003, Governor Raghuram Rajan has declared that the Central bank would migrate to a system where licences are handed out on a regular basis — ‘on tap’. The existing ‘stop and go’ policy, wherein applications are invited intermittently, leads to frenzied responses from a large number of aspirants. It is also conducive for lobbying by those who would do everything possible to grab the opportunity that comes once in, say, 10 years.

If bank licences are made available on a continuous basis, it will put competitive pressure on existing players. In his latest monetary policy statement, Rajan also talked about issuing ‘differentiated bank licences’. In other words, there may no longer be licences for just full-scale banks subject to the same capital adequacy, liquidity/reserves and priority sector lending requirements. Licences could instead vary and be given, for example, to those engaged only in the business of facilitating payments (as against lending), lending to other banks (wholesale banks), infrastructure credit and other such banking services catering to niche customers or geographies. Thus, a mobile wallet or prepaid instrument provider such as Airtel Money can be given the licence for a ‘payment bank’. It can access deposits just as normal banks, but will be required to put all this money in government securities and not be allowed to lend. This bank will also have a much lower minimum capital requirement than the ₹500 crore now prescribed for full-service banks.

Whether or not this is sufficient to qualify as a “dramatic remaking of the banking landscape”, differentiated licences have clear advantages over a system that favours the creation of new banks every decade or so and which are virtual clones of the existing ones. Such a system imposes undesirable regimentation — for example, non-banking financial companies (NBFCs), which usually have a core expertise in some area (say truck financing or gold loans), having to morph into monolithic, general-purpose banks. The main attraction for NBFCs becoming banks is the access they acquire to low-cost current and savings account deposits. But the need to adhere to the rigorous regulations prescribed for full-scale banks from day one clearly outweigh these benefits. The proposed differentiated licensing regime with separate micro-prudential regulations and restrictions on the nature of banking operations is a feasible alternative to the existing generic one-size-fits-all model.

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