Vault Matters: How relevant is a bank licence today? 

Once in a decade, starting with 1994, we’ve had new names enter the banking sector. In 1994, it was ICICI Bank and IndusInd Bank. A year later, it was HDFC Bank, and a decade later Kotak Mahindra Bank and Yes Bank. 2014 saw the birth of IDFC Bank and Bandhan Bank. Will this trend continue in 2024?

The general expectation is that there should be more banks in the ecosystem. In fact, every discussion around the economy, credit growth and financial inclusion will circle back to one point, that there is a need for more banks in the country. In fact, in 2016, when rules around bank licences were relaxed to make it ‘on-tap’, the assumption was that all candidates who rigorously pursued for licenses in 2012 would knock the doors of the regulator.

But two interesting things have happened since – almost every application (barring three which are still under consideration) that have been made in the last five years has been rejected. Second, except for Indiabulls Housing, which tried to acquire Lakshmi Vilas Bank in 2019, none of the interested candidates of 2012 are pursing for bank licences.

If any, the experience in the last decade has nudged many to conclude that there are several ways to pursue the business of lending. Even from a compliance and regulatory perspective, the Reserve Bank of India has increased the ambit of regulated entities and, accordingly, expanded the regulatory and supervisory purview, that the entity need not necessarily be a bank for the regulator be comfortable with it.

Today, non-banking finance companies face as much oversight and tight regulations as a bank, that the operational arbitrages have significantly reduced. Some of the large fintechs aren’t spared either. Therefore, does a bank licence offer alpha?

Not quite, because there are various ways of executing lending business and, unless a player is very deep pocketed and entrenched with scale and volumes, operating as a bank could end up as an expensive proposition.

But the advantage of being a bank is the ability to build a sustainable liabilities franchise over time, whether in the form of low-cost CASA or term deposits. Moreover, being a bank allows an entity to enjoy a full play in the interest income space, rather than dabbling with the fee income model.

In short, banks will always remain the big daddy in arena. But if the objective is to participate in financial inclusion, becoming a bank isn’t the solution. Perhaps it is for this reason that Annapoorna Finance’s universal bank application and two small finance bank licences are still pending approvals. Learnings from Bandhan, IDFC and a host of SFBs is that while on paper the process of converting from NBFCs to banks seems simple, it is a complete change in business model at all levels. From leadership to risk management and operations, it needs a new pair of eyes. Without these things in place, having more banks could end up as a recipe for disaster.

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