Opinion

Bank licence and a suitable rigorous RBI

Hamsini Karthik | Updated on: May 24, 2022
Preference is given to promoters who do not have litigation or investigation going on against them

Preference is given to promoters who do not have litigation or investigation going on against them | Photo Credit: DenisKot

For the central bank, its ‘fit and proper’ criteria and promoter credibility seem to prevail over pedigree or technology 

Remember the Agatha Christie novel, And then there were none? It is about ten strangers getting invited to an island where one after another, they are mysteriously murdered. The motive is pretty much left to one’s guesses until the climax scene.

There are some striking similarities between this novel and what the Reserve Bank of India did with applicants for bank licences last week. There were four applicants for universal banks under the on-tap licensing regime introduced in 2016 and all of them have been refused licences by the regulator.  

The most high-profile applicant was Chaitanya India Fin Credit Private Ltd, a microfinance lender and a subsidiary of Navi Financial Services founded by the Sachin Bansal, the poster-boy of Indian startups. Touted to be a technology led lender with strong asset quality and immense potential, the RBI turning down Chaitanya’s application came as a shock to the fintech ecosystem.  

The second striking rejection is that of Repco Bank, one of the oldest entities among the applicants with the Central and State governments owning significant equity. The list also includes UAE Exchange and Financial Services Ltd, a Pankaj Vaish-led consortium, VSoft Technologies Private Ltd and Calicut City Service Co-operative Bank Ltd. What’s pending for consideration are five Small Finance Bank licence applications, the fate of which is expected to be known in the coming months.  

The RBI’s move has yet again sparked the debate around the lack of new blood and competition in the banking space and how this decision can be counterproductive.  But RBI’s frugality with bank licences sends out a strong message — bank licences aren’t for sale, and they aren’t for all.  

Filtering process

The applicant could be a distinguished personality from India Inc, a technologically sound player capable of delivering what the current players lack or have years of legacy behind them, but what seems to matter to RBI is the quality of people backing the licensee.

If one goes into the selection process in 2013 or 2022, it seems to circle around the ability of promoters and investors to satisfy RBI’s conditions of ‘fit and proper’ promoters. RBI officially defines ‘fit and proper’ as persons with a record of sound credentials and integrity, financial soundness and successful professional track record.

Preference is given to promoters or promoter groups which do not have litigation or investigation going on against them. Unofficially, the RBI also seems to make sure that the colour of money that they bring to the table is traceable and clean and that they possess an unblotched track record in their current business.

The filtering process is elaborate which takes from six months to years to conclude and, more often than not, the test parameters are difficult to second-guess.  

But if the six names which didn’t cut ice with the RBI are to be analysed against the above metrics, the regulator’s actions don’t seem unjustified.  

For instance, Shivalik Mercantile Cooperative Bank comes across as a more professionally sound and an older outfit compared to Calicut City Services Cooperative Bank and hence was successful in converting to an SFB, while the latter could not. Likewise, Repco’s government ownership and its past asset quality problems could have been a deterrent. V-Soft may be a back-end technology provider for financial services companies but there is little to demonstrate its ability as a banking services provider.  

Business proposition 

A bank licence doesn’t offer an automatic route to scale up a financial services business. It is more an incentive to move up the value chain. The Indiabulls Housing’s unsuccessful acquisition of Lakshmi Vilas Bank in 2019, the failed Shriram Group-IDFC Bank transaction in 2017 and the list of candidates whose bank licences have been turned down, all point to this.

Despite nearly 50 years of operations, Repco’s loan book stood at just ₹7,343 crore in FY21. Chaitanya’s book after over a decade’s existence was at about ₹1,500 crore in FY21. For the others, a bank licence may well be a greenfield experiment.  

In the context of having suffered three back-to-back bank failures between 2019 and 2020, the RBI’s decision to turn down these applicants holds merit. After all, it’s the RBI and the government that are left to heavy lift the loss of bank failures and protect depositors’ interest, the burden of which has increased from ₹1 lakh to ₹5 lakh. Hence, not compromising on the internal checks is more important for the country rather than having many banks.  

Relooking fit and proper 

But to deal with criticism on the subjectivity of the licensing process, here’s something that the regulator can consider — a central processing system for conducting the ‘fit and proper’ test on licence applicants. While the RBI’s fit and proper test is said to be more rigorous than that of other regulators such as SEBI or IRDAI, it is only fair that if an applicant has been denied a particular licence, both the applicant and prospective investors are aware of the reasons for it. After all, everything involves public money.

A case in point being Bansal’s venture. While the MFI arm has been denied a universal bank licence, Navi does operate in the lending and asset management spaces. With lines blurring across savings instruments — deposits, mutual funds or insurance policies, and the cost of a loss or failure ultimately being borne by banks — it is time for SEBI, IRDAI and RBI to harmonise their scrutiny process around the ‘fit and proper’ criteria so that everyone is aware of the rules of the game.

Published on May 24, 2022
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