RBI on-tap bank licence: Rajan's reform step would mean end of banking dreams for big corporates

With just over a month left for his term coming to end at Mint Road, outgoing Reserve Bank of India (RBI) governor Raghuram Rajan has taken one of the key reform steps in the country’s banking sector by announcing final norms for ‘on tap licensing’ or continuous licensing. In simple words, this means bank licensing process will no longer be a once-in-a-decade affair. It will be an ongoing process.

From this point onwards, any eligible banking aspirant, individual or entity, can walk to the central bank with an application to start a full-service bank at any point. They don’t need to wait for specific announcement from the RBI or government on a brief window for bank licensing like that happened in 1993, 2001 and later in 2013.

In the first round, RBI gave ten permits, while two each in the second and third round. These include Kotak Mahindra and Yes Bank (2004) and later IDFC and Bandhan. Since 1990s, some of the private banks which got license, lost their race in the tough competition. They got eventually merged with other banks. A few examples are Bank of Rajasthan, Times Bank and Bank of Madura.

With on-tap licensing comes in, the RBI, under Rajan, has initiated the biggest overhaul in India’s banking structure, after readying the structure for differentiated banking regime with the issuance of small finance banks and payments bank licences. If one sees the monetary policy structure reforms too along with this, Rajan’s governorship has witnessed an era of big reforms in India’s banking industry.

But, the big highlight of ‘on-tap licensing’ norm is that corporate biggies are out of the race already. The central bank’s final guidelines clearly say that ‘large industrial houses are excluded as eligible entities but are permitted to invest in the banks up to 10 percent’. This line immediately pours ice-cold water on the plans of corporate tycoons, who wants to wear the cap of a banker. The apex bank’s move is understandable since it has never favoured big corporations setting up banks since banks primarily deal with public money. Hence, the RBI doesn’t want to take chances of private corporations misusing that money for related party lending.

Having said that the RBI has permitted business houses to invest up to 10 percent in the new banks. The question here is can RBI ensure few corporations that do not act in concert to take indirect control of a bank. Also, the RBI permits the existing non-banking financial companies (NBFCs) that are ‘controlled by residents’ and have a successful track record for at least 10 years applying for licence. So are individuals / professionals who are ‘residents’ and have 10 years of experience in banking and finance. Also, private groups ‘owned and controlled by residents’ and have a successful track record for at least 10 years.

Such entities, with total assets of Rs 5,000 crore or more and non-financial business of the group not accounting for more than 40 percent of total income, can apply. The minimum entry capital set is Rs 500 crore. In short, the RBI primarily wants good NBFCs convert to full-service banks. A private group can apply if it is primarily into financial services business with good track record of a decade. The stringent norms would mean that only very few eligible candidates can throw their hat in the ring. Not surprising given the central bank always had an aversion to corporations setting up banks.

In the last round, from the 25 candidates applied for full service bank licences, only two got the final permit — IDFC and Bandhan. The others too can try their luck once the new regulation comes into place. For the yet-to-be banked in the hinterland of the country, this is good news since more banks would mean more competition, more reach that would lower the cost of services. The RBI has made it clear that new banks under the ‘on-tap’ licensing mode cannot ignore the rural areas of the country by stipulating that at least 25 per cent of their branches should be in unbanked rural centres (population up to 9,999 as per the latest census) and they shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic scheduled commercial banks.

Under the priority sector lending rules, a bank needs to lend at least 40 percent of their loans to economically weaker sections. Financial inclusion has been a big challenge for Indian banking sector even after decades of nationalisation of banks. The new set of universal banks and the small finance, payments banks will change this scene. But, all depends on how many licences the central bank chooses to give.

With the RBI now opening the door for all eligible aspirants on a continuous basis, one gets an impression that so many new banks will now come to the picture. But that is unlikely given the stringent riders the RBI has set and the central bank’s aversion for too many banks. But, as mentioned earlier, the key takeaway from the guideline is that no big corporate house should dream of becoming a bank now, unless they can outsmart the regulator by acting in concert with interested parties.