When small finance banks and payments banks were set up a little over half a decade back, they were seen as gradual promotions or a glide path for elevation in the banking system. In five years, if a payments bank could prove its mettle, it could aspire to become a small finance bank and later a larger establishment or universal bank. Where are we in this natural progression?

Among the 10 small finance banks licences issued in 2015, just two — Equitas and AU — seem prepared to aspire become something bigger. Other have struggles of their own, and that’s a completely different topic of discussion. The scenario with payments banks is worse. The model is yet to find acceptance within the banking fraternity and its stakeholders and, hence, the question of moving up the value chain seems very distant.

How else, then, do we bring in new names into the fold? About two years ago, the regulator revealed that there are about 11 candidates looking at SFB and universal banking licences. Literally, all those who aspired for a universal licence have been shown the doors, while the fate of five applicants is yet to be known. Recently, the applications of Paytm and PayU for a payments aggregator licence, were also turned down by the regulator.

With almost every gamut of the financial services sector now regulated and requiring a licence to operate, it’s perhaps time that we understand why an application is turned down, rather than just being informed about its rejection. The regulator’s defence could be that revealing the reasons for rejection may create unnecessary speculations. But by keeping silent, the process of obtaining a licence looks like a game of lottery, rather than a logical decision.

Loans extended by the banking sector account for nearly 30 per cent of the country’s GDP, while the sector itself has a 7.7 per cent share to the GDP. It’s no longer a space that can work in vacuum. With the need for newer banking models becoming apparent, the licensing process can also become a more participative, rather than the present one-sided approach. Let’s be fair – we don’t even need realms of explanation from the RBI on why it turned down an application. But even a one line reasoning on why the applicant didn’t meet the fit and proper criteria could help avoid a lot of guessing games. More importantly, it would help channelise capital efficiently into the system.