The most significant implication of the draft norms announced by the Reserve Bank of India for granting banking licences ‘on tap’ is that the issue of when to expand banking services in the market will now be taken by those investing in setting up a new bank, rather than the RBI. Provided an entity meets the norms specified, the RBI will grant the licence. This in itself should significantly alter both the competitive landscape as well as customer experience in banking, as the expansion of services — which is what the entry of new players implies — will be driven by market forces, rather than regulatory wisdom. However, the move is unlikely to open the floodgates as far as the number of players is concerned. The draft rules set the bar high for prospective applicants both in terms of eligibility and capitalisation. Regulatory discretion and choice is built in with a variety of filters that are unexceptionable. Individuals can apply but they need at least 10 years experience in banking and finance; while non-banking finance companies can either convert themselves into a bank or apply for a new bank licence, they need a 10-year track record. The minimum capital norm of ₹500 crore, the requirement that the networth should be a minimum ₹500 crore at all times and that promoters should hold a minimum 40 per cent of the paid-up voting equity are all stiff conditions that are meant to keep away non-serious applicants.
The draft norms also confirm the central bank’s known wariness towards the idea of industrial and corporate houses owning banks. The stipulation that 60 per cent of the group’s income should come from financial services clearly disqualifies major conglomerates. However, the RBI has relaxed its stance somewhat by allowing corporates to invest up to 10 per cent of the capital of such ventures. How the RBI will mitigate the risk of such banks being indirectly controlled by a group of corporate entities owning 10 per cent or less and working in tandem, has not been spelt out and will perhaps get addressed at a later stage.
That said, these norms are a logical fulfilment of a promise made three years ago and reiterated by Governor Raghuram Rajan many times that the existing system of ‘Stop and Go’ licences would be replaced by a system that allows continuous authorisation of fit and proper entrants. Aspirants don’t have to worry about losing out on a ‘once in a lifetime’ lottery or submit hasty and sometimes faulty bids presuming they might miss the bus. A continuous authorisation system will ensure that incumbent players are challenged regularly by new entrants. The existing system that limits the number of new entrants has allowed a number of inefficient public and private banks to survive — and that is a less-than-optimal solution for customers and taxpayers. The RBI’s core objective of enhancing competition, creating new institutions that will support higher growth and furthering the cause of financial inclusion, underpins the latest efforts too.