Welcome to bank licensing Derby

On July 1, 26 horses moved up to the starting line for the bank licensing Derby.

The Budget for February 2010 indicated that the process for entertaining applications for new private sector commercial bank licences would be initiated.

The consultative process took three years before the Reserve Bank of India (RBI) announced the final guidelines in February 2013, and then another four months for submission of the applications.

The fact that, on this occasion, there were only 26 applications, as against hundreds of applications on the earlier two occasions in 1993-94 and 2002, is erroneously interpreted as waning interest in applying for bank licences. On the earlier occasions, it was much easier to weed out the less serious applications.

In the present occasion, while there are fewer applications, almost all are serious contenders.

Scrutiny of licences

Indications are that the internal processing will take three or four months and after the External Committee has tendered its advice, the licences would be issued by March 2014. There are concerns about the timeframe for the licensing procedure. The initial internal scrutiny in the RBI of all the applications should be undertaken against the backdrop of the various criteria set out in the final guidelines and without a preconceived number of licences which are deemed to be appropriate.

Role of External Committee

Given the impending change of guard at the RBI, it would not be desirable to constitute the Committee before early September 2013. In any case, the internal scrutiny will go on until October 2013. Furthermore, discussion with other regulators and agencies concerned would take some time.

It would be desirable to have the external committee headed by a former Governor, with members having experience in central banking, commercial banking, administration, legal and economics.

The Committee should have the opportunity to examine each of the applications before them.

It will take at least till March 2014 for the External Committee to tender its advice and the RBI top management to complete its assessment. Political economy compulsions would warrant that in the best interests of transparency of operations, final decisions are taken after due deliberation, say, in June-July 2014.

There should not be a preconceived decision that the number of licences granted would be four or five or, say, nine or ten. Given that one half of the population is still not covered by the banking system and the need to increase the penetration of banking, the number of licences approved should be determined by the number of applications which fully meet the criteria set out in the guidelines. A further thought is that acceptance of applications should be on tap so that there is not much hoopla over the scrutiny of applications.

Include industrial Houses

The Committee on Fuller Capital Account Convertibility (2006) recommended that industrial houses which meet all the criteria set out in the guidelines should be considered for granting licences.

The Finance Minister, in February 2010, while indicating that licences for new private sector commercial banks would be considered, had said that this would include industrial houses.

Attempts by some analysts to debar industrial houses, should be peremptorily dismissed — in fact, such analysts are fighting yesteryear’s battles.

We have long since crossed the Rubicon, since industrial houses have successfully operated in insurance, non-bank finance companies and mutual funds and there is just no point in further sterile debate.

Pleas by applicants for relaxation of the final guidelines should be dismissed. Moreover, care should be taken to ensure that any slippages in meeting the criteria and the regulatory framework should invite withdrawal of the in-principle approval.

This would also require that earlier generation banks be subject to the same criteria such as minimum capital, reduction in the percentage of ownership by the sponsor and opening of branches in rural areas.

In fact, setting up of token ‘tin sheds’ in rural areas should be subject to strictures. Efforts by banks to attain financial inclusion should be assessed by meaningful performance and not attainment of paper targets.

While the media has been active in commenting on the 26 applications for new bank licences it has, by and large, not focussed on the application by the Department of Post (A notable exception is ‘Post Bank of India’, The Hindu , July 5).

The Department of Post has been, for quite some time, articulating the need for the postal system to be given a full-fledged bank licence.

What the media seems to have missed is that the Department of Post has actually applied for a private sector bank licence.

India Post Bank

The new entity would no doubt need to be incorporated, but it would imply that the Government will have a minority stake.

The Department of Post will need to set up a 100 per cent sponsor-owned (that is government-owned) Non-Operative Financial Holding Company, and the sponsor will be required to have a 40 per cent stake in the India Post Bank which would be locked in for five years; thereafter, the sponsor would need to reduce its share in the Bank.

The private holding would best be spread over a number of institutions rather than one institution that would have a controlling interest. After a few years, the new Bank would need to list itself in the stock market and widen its ownership.

The India Post Bank, as a private sector unit, with only 10 per cent of its offices operating as a bank, would have 15,000 branches.

The total number of post-offices are 1,55,000 and, in the initial stages, the bulk of offices would need to work as extension counters of one of the branches. In due course, the larger of these extension counters would become independent branches.

Since 90 per cent of the post-offices are in the rural areas, a full-fledged India Post Bank would provide a major thrust to the avowed objective of financial inclusion.

Thus, the granting of a bank licence to the Department of Post should make it the out and out winner of the private sector bank licensing Derby.

If there is one outstanding initiative emerging from the July 1 list of applicants for new private sector bank licences, it relates to India Post.

Could this be a precursor to a shift in the immutable policy of majority ownership of public sector banks?

(The author is an economist. >blfeedback@thehindu.co.in )

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