When Pranab Mukherjee, the then Union Minister of Finance, announced in the 2011-12 Budget that the Reserve Bank of India (RBI) would issue guidelines for fresh banking licences, it is said that nobody was more surprised than the central bank itself. Till then, the RBI was keenly pushing consolidation among banks, let alone considering the issue of new bank licences.
“The 25 per cent rural presence is difficult to achieve as even the existing private sector banks are finding it hard to achieve it. That’s why we believe Indian banks must have business and delivery models to achieve financial inclusion. You simply can’t have India and Bharat when it comes to banking.”
“Technology is one of the biggest enabling factors of financial services worldwide. The emerging cloud-based applications open awesome opportunities, and more and more services are migrating to this platform. As financial inclusion itself is being seen as a corporate social responsibility, technologies can bring a sea-change.”
What followed was a tussle between the RBI and the Finance Ministry over the rulebook. The main sticking point was about large corporate entities entering the sector. The RBI wanted the rules to be framed in such a way that the door is firmly shut on large corporate houses and real estate giants in order to avoid any conflict of interest. The Finance Ministry, however, took a stand that the guidelines should not keep them out, but rather set up a barrier between owners and banking operations.
|Key Guidelines from RBI
(Issued on 22nd February, 2013)
The Finance Ministry had won the round. When the RBI issued final guidelines on 22nd February, it allowed a wider category of entities to enter banking, including corporate houses, public sector units and companies engaged in real estate and broking. But that concession came with many caveats. The central bank introduced stringent rules such as “vetting” the existing business model of the promoters, mandating a holding company structure and barring loans to other group entities. The central bank said it will use a “fit and proper” criteria, and has indicated that all the applicants satisfying them will not receive the licence.
Stipulating an initial minimum paid-up voting equity capital of 5 billion, the central bank said only financially sound promoters or groups with a successful track record of at least 10 years can submit applications. Applicants will be allowed to open a bank only through a wholly-owned non-operative financial holding company (NOFHC). The NOFHC will hold stakes in the bank and all the other financial services entities of the group and must separate its financial services entities, including the bank, from other activities of the group.
The NOFHC must hold a minimum of 40 per cent of the paid-up voting equity capital of the bank to be locked for five years. If the shareholding exceeds 40 per cent, it should be brought down to 40 per cent within three years, and further slash its stake to 20 per cent in 10 years and 15 per cent in 12 years. Banks can get listed on stock exchanges in three years. The RBI did, however, tighten requirements with regard to exposure in promoter group companies.
The RBI has made it mandatory for new banks to open at least 25 per cent of branches in rural centres, which could make the task tougher for most aspirants. The central bank also reiterated that there will be no relaxation on norms for new banks when it comes to maintaining the mandatory Cash Reserve Ratio (CRR) or the Statutory Liquidity Ratio (SLR), and that they will have to also lend 40 per cent of their net adjusted bank credit to the priority sector.
In its clarification to the guidelines issued in June, the central bank decided to extend the validity period of the in-principle approval for setting up the NOFHC from one year to 18 months. The NOFHC is to be wholly-owned by the promoters or promoter group and it cannot be a listed company. If the promoter group, which has the financial services company listed or otherwise, wishes to set up a bank, “it must transfer all its regulated financial services business to a separate company and transfer the shareholding in such companies to the NOFHC,” said the RBI.
All said, the objective of the new banking licences, a decade after a few more banks were allowed to come up in the private sector, is greater financial inclusion in a nation where 40 per cent of population does not have any kind of access to formal banking. Or, in other words, expansion of banking services to rural areas. Though the central bank has very clearly spelt out the requirement of making inroads into the rural sector, experts feel it will be tough for new entrants to meet criterion of the 25 per cent branches in unbanked rural areas. The challenge is not opening a branch in these areas, but whether it can earn business from these centres.
“Financial inclusion and financial literacy are two sides of the same coin. In rural India, whether you like it or not, the basic problem is lack of financial literacy. We also have about 1,50,000 business correspondents employed by various banks. However, are they properly trained? Are they properly paid? The answer is, unfortunately, no.”
"To scale up operations in rural India, we must refine the business correspondent model. A business correspondent who is really capable of doing rural business, and whose core competency is self-help group formation, can do wonders. With the deployment of information and communication technologies and such approaches, we could do more.”
“The 25 per cent rural presence is difficult to achieve as even the existing private sector banks are finding it hard to achieve it,” admits Deepali Pant-Joshi, Executive Director, Reserve Bank of India. “That’s why we believe Indian banks must have business and delivery models to achieve financial inclusion. You simply can’t have India and Bharat when it comes to banking,” she adds.
“The RBI will be extremely careful about the selection process, but that doesn’t mean that we don’t need more banks. Apart from expansion, the new banks will intensify competition and benefit consumers. In fact, banking and insurance are a unique space where the entry of new players has sparked competition, which, in the long term, has benefited the industry as well as consumers,” she adds.
She hoped the new entrants would add to the resilience of the state-run banks, besides deepening the government bond market. “Competition can bring down the bond yield too, helping the government to grapple with high fiscal deficits. More importantly, competition will benefit the consumers. Research and development will simplify services. Let new banks come up with business and delivery models for others to adapt,” she adds.
Ashish Kumar Roy, Chief General Manager, Rural Business, State Bank of India, is optimistic about inclusion targets. “Increased competition in the regular business among banks will help inclusion,” he says. He, however, points to the viability issues that hinder the ability of banks to expand continuously. Most of the small-value accounts are inactive. “There is a chicken-and-egg syndrome banks face. Should banks open branches and employ business correspondents before or after enough economic activity is created? Which should follow what is a perennial question faced by banks. I believe there should be a viability gap funding by agencies like Nabard or the bank themselves to incentivise the rural push,” he explains.
He believes that new private banks cannot threaten public sector banking entities. “Instead of giving in to the technology-savvy modern private banks, India’s state-run banks learnt from them and got better. The key reason behind their tenacity is the government’s decision to list them on bourses simultaneously when it opened up the sector for private players. The government never sold its stake in these banks directly. Instead, the banks raised money from the public, expanded their equity base, and, in the process, the government’s stake was pared,” he adds.
|LIST OF ASPIRANTS
(In alphabetical order)
R B Gupta, General Manager, Priority Sector & Financial Inclusion, Central Bank of India, highlights the need for greater financial literacy. He says at the grassroots, people don’t understand what inclusion means. “Financial inclusion and financial literacy are two sides of the same coin. In rural India, whether you like it or not, the basic problem is lack of financial literacy. We also have about 1,50,000 business correspondents employed by various banks. However, are they properly trained? Are they properly paid? The answer is, unfortunately, no,” he adds.
Bandhan Financial Services, a microfinance company, is a bank licence aspirant. Its Chairman & Managing Director Chandra Shekhar Ghosh says his experience in the industry taught him that personal touch is the most valuable asset of any banking institution. That’s how, he asserts, microfinance agencies like his have developed entrepreneurs in their customers, not just service holders. “Microfinance institutions should be recognised for the role they play in creating an army of entrepreneurs in rural India, and the credit needs of those entrepreneurs are increasing day by day. Entrepreneurship is very important to poverty alleviation. Without it, higher growth rate will remain a mirage,” he adds.
When the deadline for applications passed on 1st July, the central bank has received submissions from 26 entities for setting new private banks.
“Financial literacy should be seen as a necessary condition for customer empowerment. Only through expansion into rural areas and efforts to improve literacy can people, especially those belonging to economically weaker sections, take advantage of the various services offered by nationalised banks for their socioeconomic growth.”
“Increased competition in the regular business among banks will help inclusion. Viability issues hinder the ability of banks to expand continuously. Should banks open branches and employ business correspondents before or after enough economic activity is created? Which should follow what is a perennial question faced by banks. There should be a viability gap funding by agencies like Nabard or the bank themselves to incentivise the rural push.”
All said, the goal of the banking regulator is very clear. The RBI wants to take banking to the unbanked, and this time, it has made it a strategic choice to set the bar higher. That shows that the central bank’s policies have evolved since the last two rounds of bank licences in 1993 and 2003-04. Obviously, those rounds of licensing have failed to solve the problem of financial exclusion.
However, some questions central to financial inclusion refuse to go away, despite the RBI’s tough guidelines. Has customer service improved since new banks came onto the scene? How does the central bank define “rural”? If a bank open a branch in the rural suburb of a metro or a Tier-II city, will it still qualify as “rural”? This is what the private banks (which have won licences in the last two stages) seem to have done to burnish their financial inclusion credentials. This is why the idea of financial inclusion stands on its head in India. Also, will the central bank apply the same 25 per cent rural branches norm to the existing private banks?
Experts are unanimous in the opinion that the condition of having a fourth of a new bank’s branches in rural areas will hamper profitability and breakeven will take at least a decade to reach. How will the central bank ensure taking banking to the unbanked – as opposed to mere lip-service to it – against such odds? Will public sector banks continue to shoulder the main responsibility of opening more branches in rural hinterlands and building a solid current account saving account base there? If so, the very raison d’être for new bank licences will be scuppered. Priority Sector Lending (PSL) is another grey area. According to regulations, banks have to lend 40 per cent of their loan disbursements to agriculture, micro, small and medium enterprises (MSMEs), education, housing, weaker sections and export credit. According to the central bank website, “Priority sector refers to those sectors of the economy which may not get timely and adequate credit in the absence of this special dispensation. Typically, these are small value loans to farmers for agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections.” However, it will be interesting to know how many of the existing private sector banks meet the lending requirement set out by the RBI. In the case of MSMEs, empirical and anecdotal evidence suggests that they put so many hindrances in the way of lending to them that the total credit advanced to them is derisory.
This is why the central bank has to be judicious in handing out new licences. Tough guidelines are fine, but without a well-calibrated approach and strict monitoring, financial inclusion will remain a bridge too far, despite new private banks.
S S Bhat, General Manager, Priority Sector, Canara Bank, agrees that a lot of untapped opportunities are there in the rural areas. “Financial literacy should be seen as a necessary condition for customer empowerment. Only through expansion into the rural areas and efforts to improve literacy can people, especially those belonging to economically weaker sections, take advantage of the various services offered by nationalised banks for their socioeconomic growth,” he says.
Let SEWA do full-scale livelihood banking
In the post-liberalisation era, for the third time, the Reserve Bank of India (RBI) is moving up for licensing new banks in the private sector. Earlier in each time, the Finance Ministry and the RBI have had taken a decadal span of gap before ushering the Indian banking industry into a new dynamic trajectory with its overt reformative touch.
K Ramamurthy, General Manager, Financial Inclusion, Corporation Bank, believes that for scaling up in rural areas, innovative approaches and technology are equally important. “Apart from that, to scale up in rural India, we must refine the business correspondent model. A business correspondent who is really capable of doing rural business, and whose core competency is self-help group formation, can do wonders. With the deployment of information and communication technologies and such approaches, we could do more.”
Yet, there are some worthy aspirants like Bandhan and the Department of Posts which have taken the viability issue of rural operations head on and overcame them. Their experience shows that there is a lot of money ready to migrate to low-cost deposits in rural India if the banking partner is resolute in its focus. As Chandra Shekhar Ghosh remarked, there are millions of entrepreneurs waiting in the wings, and their credit needs will keep increasing day by day.
Karan Bajwa, General Manager, Microsoft Corporation (India), opines that the new banks will not have any legacy issues on technology, which can be counted as an advantage. “Technology is one of the biggest enabling factors of financial services worldwide. The emerging cloud-based applications open awesome opportunities, and more and more services are migrating to this platform. As financial inclusion itself is being seen as a corporate social responsibility, technologies can bring a sea-change,”
Therefore, India not only need huge delivery systems and technology that goes into making a successful modern bank but also determined players who are capable of trail-blazing efforts to reach out to poorer sections of its society, especially in markets that are very difficult to crack.
As our case studies suggest, it’s time the central bank thought out of box and calibrated its decisions on a more realistic approach to financial inclusion.
(Comments are welcome at firstname.lastname@example.org)
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