RBI New Banking Licences
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Transcript of RBI New Banking Licences
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RBI: New
bankinglicenses
policy in India
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RBI: New banking licenses policy in India
The last few years have seen a spate of alternative banking channels replacing traditional
brick and mortar structures, thereby reducing branch dependency and lowering fixed costs
and overheads. IT innovation in the banking sector has resulted in automated transaction
processing, streamlined operations, and fewer errors on account of minimal human
intervention. Also, with focused and seamlessly integrated multi-channel support, banks
today aim for improved customer service and enhanced productivity and profitability. They
also strive for financial inclusion, introducing Smart cards supported by !S devices and
online" offline connectivity. #ollaborative models with telecom companies, such as Airtel $
for Airtel %oney $are opening up new vistas.
Adding a new branch to a bank&s network is an expensive proposition re'uiring a great deal
of thought and analysis. This paper provides a deep dive analysis on the (eserve bank of
India )(*I+ licensing policy for new *anks and its impact.
India&s banking ecosystem is constituted by different *anks"inancial institutions catering to
the needs of different industry and consumer segments. The banking industry of the country
controlled by (eserve *ank of India, A*A( and other regulators had contributed to the
economic growth of the country.
/hile analy0ing the concentration of *anks in India, the urban areas are dominated by ublic
Sector, rivate and oreign *anks while semi-urban areas are served by the ublic Sector
and (ural (egional *anks )((*+ in addition to #o-operative *anks. *anking presence is
minimal in rural areas with a few #o-operative *anks and ((*s. There are still unbanked
areas in the rural segment.
Rural scenario
igures from the 1233 census indicate that out of 3.13 billion Indians, 455 million live in
villages and 566 million in cities7 rural areas account for nearly 628 of the total population.
!ccupation in these areas include agriculture, dairy farming, small cottage industries etc. A
study by ricewaterhouse#oopers observes that this section of the Indian population is
largely unbanked and that it is essential to leverage technology to reach it. According to facts
and figures thrown up by this study, only 568 of Scheduled #ommercial *ank branches
operate in rural areas with a dismal 928 of the population holding bank accounts. Statistics
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also indicate that banking reaches only 568 of the population while mobile phone
penetration is higher at :28. There is 3 bank branch and AT% for every 32,222 people .!n
the other hand, penetration of mobile phones is :322 per 32,222.
Some more figures from a /orld *ank study depicting the average population holding
accounts with formal financial institutions;
RegionPercentage
(Approx.)
/orldwide :28
eveloping
=reater %umbai )population 31.: million+ alone accounted for 118 of total
deposits and 1:8 of total credit in ? 1232-33.
> The top six centres namely, =reater %umbai, elhi, #hennai, @olkatta, *angalore
and hyderabad together accounted for 98 of total deposits and :8 of total
credit in 1232-33.
> A geographical distribution showed that 3"5 of the total credit as of %arch 1233
was from the western region.
> A population-wise distribution indicated that of the total credit as of %arch 1233,
48 was from the metropolitan region, B8 from semi-urban areas, and 8 from
rural areas.
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Deposits
According to data from the %c@insey Survey, CIndia *anking !verviewD, from 122
onward, 28 of all savings deposits belong to 168 of the urban population $ a stark
indication of the need for financial inclusion in rural India.
!nly about 968 of the total savings is accessed by the financial sector )122:+, which means
that a maEority is outside the banking channel for want of banking reach and"or confidence.
This is a maEor contributor to Cblack moneyD in the financial system.
The tendency in rural and semi-urban areas is to hoard cash, gold, silver etc. at home,
increasing the risk of theft. Also, idle money leads to loss of income for an individual and
adversely impacts the country&s economic growth, resulting in a vicious cycle.
#ountry
=
#ontribution
8
#hina .:
FSA :.5
India :.3
F@ 9.4
%alaysia 1.
Thailand 1.:
espite the bleak outlook, the contribution of our banking sector to = has been in line
with other developed countries )data 122:+.
A brief analysis of the above ;
> Ample scope for penetration of *anking in the Tier 1 G other centres in India
> Hast potential to bring a maEor chunk of the population under the organi0ed
banking sector
>
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> #ost of intermediation can undergo a substantial reduction due to increased
penetration G economies of scale
As part of (*I measures to take banking to rural areas, the financial inclusion model was
commissioned almost 1 decades ago. owever the (*I has come to realise that *usiness
#orrespondents )*#s+ alone cannot drive financial inclusion and that rural customers need
the confidence and reassuarance of a bank branch.
#ertain measures need to be taken to;
> *uild confidence in the safety of the banking system.
>
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Issue o& New Banking licences by t'e RBI
(n'ance#ent o& rural penetrationIssuance of licenses on the condition that the bank will open at least 1:8 of its branches in
rural areas is a good way to strengthen banking services in those places. Fse of technology
and modern infrastructural facilities in addition to core banking solutions and various
delivery channels will help improve customer service. /hile healthy competition among
banks can be good for the customer in terms of products and services, it can prove
counterproductive for banks, making some branches unviable.
The following is a data snapshot for some top-ranked public and private sector banks for a
better insight into the Indian banking scene;
Statistics; .?. 1231
)D%*
Bank
I*I*I
Bank
Axis PNB $BI
eposits *ase
)I( *illion+ 1,96.2 1,:::.31 1,123.29 5,6B:.44 32,95.96
Advances *ase
)I( *illion+ 3,B:9.12 1,:56.14 3,B6.2 1,B56.6: 4,6:.6B
et Interest
%argin 9.118 1.658 5.:B8 5.49 5.4:8
*ranches 1,:99 1,6:1 3,11 )including :,:4 392B6
AT% 4,B35 B,22 B,B19 ,22B 11,393 $ for
S*I
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=ross A 3.228 2.1 -2.1:8 1.B5 8
)3.:18+
9.998
)3.418+
)et A+ -2.348
(!A 3.668 3.:28 3.48 3.3B8 2.448
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increasing domestic competition in banking over the medium to long term scenario. however
further reforms are needed to facilitate infrastructure development and encourage much
higher levels of corporate investment. The potential of the Indian market makes it extremely
attractive for international banks but given the challenges that remain, the benefits of
investments may only be reali0ed over a long period.D
=iven the country&s population of over 3.13 billion, there is ample scope for entry of new
banks. ue precaution taken by the (*I before giving ew *anking Jicenses )*J+ can
avert an %GA situation.
Potential #isuse o& low,cost &unds by industrial 'ouses wit' banking licenses
The (*I has in place ample checks to restrict fund diversion by industrial houses with bank
licenses. The legal structure of all financial services entities of the promoter, board
composition, financial sector experience of the top management, voting rights, shareholding
restrictions, maximum cap on I"(I"II holdings, transparency in source of e'uity,
realistic and viable business plans are some of the key aspects that the (*I would be looking
into.
%andatory listing of new banks within three years as proposed by (*I draft guidelines will
ensure that they are under the purview of both the (*I and Se*I )Security and exchanges
*oard of India+ for that duration.
The promoter or holding company should contribute a minimum of 928 of the total e'uity,
to be locked in for five years. ew banks will also have to maintain a minimum #apital
Ade'uacy (atio )#A(+ of 358 for the first three years. eedback from various agencies
such as the Income Tax epartment and enforcement irectorate is re'uired before
sanctioning licenses.
In addition, checks through core banking solution implementation and disciplinary and
penal action in case of breach of conditions will go a long way in safeguarding public
interest.
or effective procedural implementation of new license issuance, the (*I intends to appoint
a high-level advisory committee comprising individuals with vast experience in the banking
and financial services sector, who in turn will ensure that licenses are given to industrial
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houses with valid credentials and the right motives. The emphasis here would be on the
profile of the aspirants and their background, ensuring that their business culture is aligned to
that of a bank7 that they carry sound credentials7 and hold an impressive track record in their
line of business. *esides, these new banks would need
to list within three years and the banks& boards should have independent directors.
urthermore, the (*I has sought powers to dissolve banks in the event of severe violations,
thereby putting public interest above all else.
ew banks, with large corporate houses at their helm, will bring to the table their vast
expertise and infuse freshness and innovation into this sector, while complying with the
(*I norms.
In a nutshell, collective, mass banking is the way forward for the larger good. *anks,
software and technology sectors, services industry comprising auditing firms, trade and
commerce at large and the general public, all stand to gain from this. Increased deposits and
credit growth in addition to availability of low-cost funds would have a positive impact on
the country&s economy.
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*onclusion
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(eferences
1.articles.economictimes.indiatimes. com"1233-26-3:"news"1B666B:9K3K rural-areas-
urban-areas-census-report
2. thecalibre.in"in-depth-current-affairs" rbi-sets-up-panel-on-financial inclusion"321231"L
pM36:2
3.www.rbi.org.in"scripts"Annual(eport ublications.aspxLIdM3254
4 www.marketwatch.com"story" china-construction-bank-profit-beats-forecasts-1231-32-14
5.http;""www.mckinsey.com"
6./ebsite of respective banks, Indian *anking Association, (*I, database and multiple
reports along with (*I (eport on Trend and rogress of *anking in India 1232-33
7.Times ews etwork
8.The economic Times