The story of new generation banks, so far

The first time the Reserve Bank of India issued guidelines for new banks was two decades ago on January 22, 1993 just as the economy was opening up.

When the RBI issued guidelines, it received 113 applications, many of which were from large industrial houses.

Then the RBI asked the first chairman of IDBI, Sharad Marathe, to review the applications, and then finally picked 10 applications including four that were backed by institutions.

Of the 10 which started in 1994, four didn’t survive. Three (Times Bank, Centurion Bank which had taken over Bank of Punjab) merged with HDFC Bank while another new bank — Global Trust Bank — was forced to merge with the public sector Oriental Bank of Commerce.

After a lull, the RBI in 2004 once again allowed two private banks — Kotak Mahindra Bank and YES Bank.

Despite the failure of four banks, the experiment with new private banks can generally be termed a success. Private banks have been inching up in market share and in profits. Four of the top 10 banks in the country are private.

In terms of deposits and advances, new-generation private banks have overtaken their old-generation counterparts. (see table).

For the last four years, the Government has been pushing the financial-inclusion concept to help banks reach out to the un-banked. This will, therefore, be underpinning for the new licences.

The RBI is uncomfortable with industrial houses entering the arena, given the possibility of conflicts of interest and diversion of funds and endangering the safety of depositor money in times of crisis. On the other hand, its entry barriers are likely to be set at a level that will place it only within the reach of those with deep pockets.

> vinayak.aj@thehindu.co.in

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