Mrunal New Bank Licences - Ready Revision Note For IBPS & UPSC

7/8/2014 Mrunal New Bank licences: Ready revision note for IBPS & UPSC
http://mrunal.org/2014/04/economy-new-bank-licences-bandhan-idfc-bharatiya-mahila-bank-differential-bank-licences-bimal-jalan-committee-narsimhan-commit 1/13
[Economy] New Bank Licences: Bandhan, IDFC, Bharatiya Mahila Bank;
Differential Bank licences, Bimal Jalan Committee, Narsimhan Committee;
arguments favor against, Bank nationalization, Historic evolution of Banking
sector in India
1. Prologue
2. Banking sector in British India
3. Birth of RBI
4. Banking sector Post Independence
5. Narsimhan Committee I (1991)
6. Bank licences: 1
st
Round (1993)
7. Narsimhan Committee II (1998)
8. New Bank licences 2
nd
round (2001)
9. New Bank licences 3
rd
Round (2013-14)
1. Bandhan Microfinance and IDFC
2. In principle approval
3. What is Differential licenses?
4. New Private banks: Pro and Against arguments
10. Bharatiya Mahila Bank (2013)
1. How is it a Mahila Bank?
2. Business plan of Mahila Bank?
3. Why Mahila Bank is mere publicity stunt?
Prologue
important: SSC has uploaded halltickets for reexamintion of CGL-2013 to be held on
27th April. Respective players check your regional SSC sites accordingly. now coming
to the subject
Bandhan and IDFC got new licences, you already know that. its just two line current
affairs. but for SBI /UPSC interviews, we need to some background information for
questions like:
1. After Sahara Scam and NSEL crisis, why should we risk giving bank licences to
private companies? In fact why not simply nationalize the existing private sector
banks so they cannot do any scams!?
2. We already have large banks such as SBI, ICICI, BoB- all of them having pan-India
presence, capable of fulfilling the goal of financial inclusion, then why is there a
need to get new private sector banks?
To answer such Devils advocate type interview questions, we need to go back in
history:
Banking sector in British India
There were two types of banks
British Banks Swadeshi Banks
First, East India company
establishes three Presidencies
in India- Bombay, Bengal and
Madras
Three Presidency banks setup
in those cities. Later merged
into one Imperial bank
(21)=> SBI (55)
Parallel to British banks, Indian banks also
setup- Allahabad Bank, Punjab national
bank (PNB), Bank of Baroda (BoB),
Canara bank etc.
Their target audience = British
army, civil servants and judges
Target audience= big merchants, particularly
raw-material exporters in Bombay and Madras
Presidency.
Overall, neither British Banks nor Swadeshi banks helped in the financial inclusion of
poor people, they still had to rely on local money lenders and Zamindars.
Birth of RBI
By early 30s, there were >1200 banks in India!
But all of them under Companies law- there was no banking regulation, no RBI, no
SLR, CRR, repo rate, reverse repo rate etc. So the Civil service & BankPO
aspirants of that era, were relatively Stress free compared to present generation.
Problem starts with Great American depression (29) => sharemarket and
companies of US and Europe collapse= raw material import declines = desi
merchants cannot repay loan EMIs = Indians banks starts collapsing one by one.
therefore, British Indian government setups Reserve bank of India to supervise
over these banks (34)
Banking sector Post Independence
Click to Enlarge

from mid-50 onwards, there is gradual expansion of banking sector in India
SBI, ICICI, PNB, BoB all start opening more and more branches.
but still target audience= merchants, urban (upper) middle class and industrial
houses
Branches increased? YES
Rural penetration? NO
Did they help aid in Five year plans like giving cheap loans to farmers and micro-
enterprises? NO
All these banks were in the hands of industralists. (who owned majority
shareholding => can vote majority of board of directors=> banks policy decision
will only be made to suit those industrialists e.g. opening branches near factory-
townships, giving loans @cheap rate for setting up new factories and so on.)
Nationalization
Government gets impatient with ^all this.
starts nationalizing banks (By taking over the ownership from those industrialists)
Year
How
many?
who?
55 1 Imperial bank (SBI)
69 14 banks with >50 cr. deposits.
80 6
banks with >200 cr. deposits (Andra, Vijaya, Oriental bank of
commerce etc.)
Nationalization: more problems
1. In theory, nationalization =government becomes majority shareholding in those
banks => government can pick board of director of her choice = bank takes
decisions to suit governments Five year plan requirements= everyones happy,
right? nope
2. In reality, nationalization =created more problem than it solved. for example
3. Now all the board members = politicians, their relatives, retired IAS/IPS etc.
Result? Professionalism =nope, sycophancy=yes.
4. Banks were forced to give loans @throwaway prices to farmers/ small
enterprises, sometimes even cost of giving loan (staff salary, light bill, office rent
etc.) would be higher than the profit involved.
5. Local politician interfered in operations. Run loan mela in our Constituency,
open all branches in RaiBareily and Amethi only, pass applications of our
chamcha-log. They would get lakhs of rupees @4% interest rate (to buy cattle)
and then circulate the same money to farmers @36% interest rate and so on
6. When banks tried to recover loan money from such political elements, t heyd get
stay order from courts, then taarikh pe taarikh.
7. This politicization even came into Bank employee unions- theyd always demand
higher wages and lower working hours, irrespective of how much profit bank
made.
8. adding insult to injury, RBI kept the CRR and SLR very high (15 & 40%
respectively)
9. =very less money left for banks to lend.
10. Business man cannot get easy loans = no business expansion =export declines =in
a way all this contributed to the Balance of Payment crisis (BoP) in 1991.
moral of the story = nationalization is not a solution even if Sahara, NSEL,
Ramalinga Raju, Ketan Parekh, Harshad Mehta or Mr.XYZ is doing scam- that doesnt
mean you should nationalize everything.
Narsimhan Committee I (1991)
By government of India in 1991. It recommended following:
recommendation result?
Government / RBI mustnot regulate the
banks loan interest rates. Banks should
be allowed to decide their home loan,
bike loan etc rates by themselves.
RBI adopts BENCHMARK PRIME
LENDING RATE (BPLR) => nowadays
Base rate system.
setup Debt recovery tribunals. so loan
defaulters cannot get stay orders from
courts, no more Taarikh pe taarikh
DRT setup in 1993 => later SARFAESI Act
in 2002 to give them more powers.
Liberate Branch expansion policy. Let
the banks open branches outside
Raibarely and Amethi also.
done. banks can open branches anywhere.
only condition 25% of the new branches
each year must be setup in rural areas. For
more read Nachiket Committee article.
Reduce CRR and SLR so banks are left
with more money to lend.
Done, gradually reduced. from (15,40)=>
(4,23)
NBFC regulatory framework done
government should reduce its
shareholding from public sector banks.
done, SBI shares sold, nowadays
government owns ~60%. (this facilitates
entry of professionals in the board of
directors)
Allow entry of private sector banks and
foreign banks.
done, leads to first round of bank licences,
explained below:
Bank licences: 1
st
Round (1993)
RBI invites application 1993
New private banks start Operation: 1994-95 onwards
Total ten private banks given licences: 6 still running + 4 closed down.
6 running
1. ICICI
2. HDFC
3. UTI=>became Axis bank (2007)
4. IDBI
5. Indus
6. DCB
All of above running successfully, so that gives us positive arguments- that not all
private entities are seamstress. in fact, ICICI, HDFC, Axis = top banks of India, even
have presences abroad, employ lakhs of people. Hence no harm in giving bank licences
to private players.
4 closed down
Bank
merged
with
why?
Global
Trust
Bank
Oriental
bank of
Commerce
recall Ketan Parekh- he took money from Madhupura
cooperative Bank, Abad and used it to run scam in
Sharemarket. Same Ketan had also taken some money from
Global Trust bank also=> news stories =>junta panics and
runs to take out all money=> business collapsed.
Bank of
Punjab
Centurion
bank
loss making. hardly any depositors and loan takers, couldnt
stand in competition against SBI, ICICI, BoB etc.
Centurion
bank
HDFC same as above
Times
Bank
HDFC same as above
These four #EPICFAIL banks give us the negative arguments that private companies
must not be given bank licences. Because they can also close down like ^these, creating
panic among the clients, blood pressure, heart attacks and suicides.
Anyways, moving on
Narsimhan Committee II (1998)
1. Introduce Voluntary retirement scheme (VRS) in public sector banks.
2. Legal reforms for loan recovery. =>SARFAESI 2002
3. Computerization, electronic fund transfer, legal framework
4. Payment and Settlement Act=>Retail (ECS, NEFT, Card) + Wholesale (RTGS)
5. Continue allowing entry of private banks and foreign banks.
New Bank licences 2
nd
round (2001)
2001: applications invited
2003-04: winners launch banks.
From the earlier #EPICFAIL of those four banks, RBI also learned lesson.
This time RBI gave licence only two strongest contenders:
1. Kotak Mahindra
2. Yes Bank
New Bank licences 3
rd
Round (2013-14)
2010: Finance minister says we need to give more licences.
2013, February: RBI invites applications with following conditions:
Conditions/guidelines for new bank licence application:
1. must include class 10-12-college marksheet, school leaving certificate and three
passport sized photos
2. 10 years successful work-ex (=Fit and proper criteria)
3. minimum capital Rs.5 billion
4. Will have to get shares listed on stock exchange within three years, bring down
voting rights to 15% within 12 years. why?
say Anil Ambani gets licence, in the beginning hed have ~100% ownership and
decision making. But in the long run such one man game show = not good in
banking sector. So hell have to get the shares listed within three years.
once shares are listed, junta starts buying those shares= they elect the board of
directors (BoD) and then BoD makes policy decisions of the bank, appoints CEO
and top executives and so on.
By 15 years, Anil should sell majority of his shares to junta- so that he holds
barely ~40% or less of the bank shares = he cannot have lot of say in banks
decision making = bank doesnt run according to his whims and fancies =rational
decision making.
Anyways moving on to the rules
5. foreign shareholding must not be more than 49% (for the first five years)
6. 50% of the directors should be independent (=not chosen by majority shareholder
e.g. Anil)
7. Such bank must not invest in shares/bonds of its parent group (e.g. Anils
telecom/electricity business)
8. must have viable business plan
9. must open atleast 25% branches in the unbanked rural areas. (as per latest census
there are ~10000 such places)
10. Have to comply with PSL (priority sector lending) norms.
Many other technical rules but for descriptive/interview answer- above 9-points
sufficient.
Total 26 applied, including Anil Ambani, Birla, Bajaj, Tata, Muthoot, Indian post.
later two left (TATA, Videocon)
+ one came (KC Land and finance ltd.)
Thus 25 left.
Bimal Jalan Committee
Now Rajan had to decide winners among those 25 applicants.
Sep 2013: Rajan sets up RBI High level advisory Committee to process those
applications.
Bimal Jalan (Chairman) Former RBI governor
Usha Thorat Ex-RBI Deputy Governor
C B Bhave Ex-Sebi chairman
Nachiket Mor RBI board member
Important: Bharatiya Mahila Bank also launched in Sep13 (but its public sector bank,
has nothing to do with this third round of Bank licences or Bimal Jalan Committee)
Anyways, moving on
November
2013
Bimal first meeting
February
2014
Bimal submits report
March 2014
Rajan fears Election commissions model code of conduct, seeks
their approval.
31
st
March
EC gives approval
2
st
April
Two winners announced. (Bandhan Microfinance and IDFC)
Bandhan Microfinance and IDFC
Bandhan Microfinance
IDFC (Infrastructure Development and
Financial Corporation)
West Bengal Mumbai
Micro-finance company infrastructure finance company
Chandra Shekhar Ghosh Rajiv Lall
net worth 1100 Cr., 45% branches
in rural areas
net worth 21000 cr., but rural presence low.
These two are given only in-principle approval. Meaning
In principle approval
Within 18 months
must get net worth Rs.1000 crore
Must open 25% branches in unbanked rural areas.
once they fulfill above conditions, RBI will give them licence under Banking
Regulation Act, 1949 [Sec.22(1)]
Once they get licence under BRA, then we can open current account, savings
account etc.
RBI has also prohibited the promoters (Ghosh and Lall) to hold CEO position in their
respective banks. This is meant to prevent conflict of interest. Because in past, Global
Trust banks CEO Ramesh Gelli was accused of involved in Ketan Parekh scam.
Curiously though Yes Banks promoter Rana Kapoor enjoys both MD and CEO position
in his bank!
India post
For Indian postal department, Bimal Jalan said RBI should consult separately
with government and give licence if necessary.
Kumar Mangalam Birlas name involved in Coal block scam, Anil Ambani in 2G
case, hence licence not given.
What is Differential licences?
Total 25 applied, but only two won so what about the remaining 23 contenders?
Will they get any consolation prize? Yes.
Rajan said they can later apply for Differential bank licences.
Differential bank licences = for opening payment banks, wholesale banks etc
(whore not full banks like SBI, PNB etc.)
for more on these differential banks read following articles on Nachiket
Committee:
1. Wholesale Banks
2. Payment Banks
New Private banks: Pro and Against arguments
Anti arguments Pro arguments
There is no need for additional
private banks, existing banks
sufficient.
Existing banks not sufficient for 100%
financial inclusion.
only one in two Indians have bank account
Only one in seven Indians gets loan from
banks (others have to rely on the evil money
lenders who charge 36% compound interest
rate!)
As per Census 2011
Only 67% of Urban households getting
banking services.
Only 54% Rural households getting banking
services.
well in that case, government
should launch some Rajiv Gandhi
scheme to open bank accounts
for everyone, there is no need to
get new private banks! Besides,
Throwing sakaari money, subsidies and
schemes to solve every problem = bad idea.
Business has to become vibrant by itself.
It is true both Bandhan and IDFC are
mosquitos compared to elephants like SBI
http://mrunal.org/2014/04/economy-new-bank-licences-bandhan-idfc-bharatiya-mahila-bank-differential-bank-licences-bimal-jalan-committee-narsimhan-comm 10/13
these two (Bandhan and IDFC)
are too small to be any relevant
in financial inclusion.
and ICICI but every maestro was an amateur
someday.
As per your own table, Bandhan
already has 45% of her branches
in rural area as microfinance
company, then why do they need
bank licence? Theyre already
doing financial inclusion!
as a Microfinance company, Bandhan cannot
open savings account / current account etc
(Because they dont have bank licence)
as a result, such microfinance companies
have to borrow money from other banks,
NABARD etc @12-15% interest + have to
maintain profit margin=> they give loans to
poor people yes, but at 23-25% interest rate.
but if same Microfinance company was given
bank licencee, they can accept publics
deposit money under savings account ~4%
interest, fixed deposit ~9% interest =>
cheaper way to arrange loan money. can give
loans to poors at reasonable rate like 10-
15%
In the first round, ten banks were
given licence, four of them
closed down..private sector
cannot compete with existing
giants. They try to take
shortcuts, hence all the scams.
The same licensing round gave us giants like ICICI,
Axis bank and HDFC. It is wrong to think every
private player is out there only to bully, loot and
steal.
The same ICICI Bank, HDFC
Bank and Axis Bank were caught
violating KYC norms and doing
money laundering case in the
Cobra post sting operation.
RBI has taken quick and firm action against those
three banks. And the inquiry revealed it wasnt the
mass scale organized money laundering operation
but irregularity on part of certain branch managers
to overcome the targets.
These two small players cannot
even afford to launch all India
ATM network, forget about
opening branch offices.
They dont need to open ATMs anyways, because
of the White label ATM scheme.
RBI should gave given licences
to more applicants, like they did
in the 90s (ten licences).
In the early 90s, all nationalized banks were
heading towards #EPICFAIL, so to correct the
course, RBI had to get in more players to breed
competition. Same is not the case today- two new
banks are good enough. If Rajan gave licence to
15-20 applicants at once => too much competition
=> predatory pricing like in aviation industry =>
smaller players will be wiped out.
Public sector banks are already
bleeding because of the heavy
In the end, Business is all about the survival of the
fittest. Public sector banks and their trade unions
marketing and teaser rates
offered by Private banks. Two
more such banks will increase
the misery of the public sector
banks.
should learn to perform or perish. Customer
deserves better services. Just to make life easier
for sarkaari banks, we must not prevent the entry of
private sector.
Rajans American ideas of free
market, wholesale banks,
differential licenses etc. will
ruin Indian banking sector and
Economy. What works in USA
need not automatically work in
India as well. This will lead to
subprime crisis like disaster.
Just two new banks cannot create Subprime crisis.
RBI is much more vigilant and strict than their
American counter part US feds. It is wrong to
assume that Rajan comes from America so he is
automatically an evil capitalist, and all the
hushiyaari (smartness) is with Newspaper
columnists in The***** only.
More pro-con arguments can be added, post them in comments below!
Bharatiya Mahila Bank (2013)
This has nothing to do with Bimal Jalan Committee or third round of private bank
licences. But to confuse you in MCQs, the examiner will deliberately include some
facts related to Mahila bank. Therefore, you must know the basics:
Budget 2013: Chindu announced to open this bank with 1000 crore Rs. (=100%
State Owned / public sector bank.)
Keep in mind, Chindu also setup Nirbhaya fund for women security initiatives.
But thats separate 1000 crore fund and this is separate 1000 crore bank. (tricky
MCQ)
Concept is not new: Pakistan and Tanzania already setup such banks in past.
MBN Rao Panel prepared blue print (he was chief of Canara bank)
Sept. 2013: licence given
November 2013: bank launched on Indira Gandhis bday.
HQ= Delhi but since assembly election was going on, hence to follow the model
code of conduct, they launched the bank from Mumbai
How is it a Mahila Bank?
Boss Usha Anantha-Subramanian =woman
Board of Directors=all women.
but staff = male + female
mid-level staff from BoB, PNB on deputation= male + female.
Customers (Depositors) = male + female. (no distinction among them, both get
same interest rate on their savings account / FD etc.)
BUT Loan giving => predominantly to women.
Women entrepreneurs can get loans up to Rs 1 crore without collateral (meaning
they dont have to mortgage their house/factory/jewellary)
kitchen loans, education loans, small home-based catering businesses
Projects for Skill development, financial literacy among women.
hence the name Mahila Bank- because itll predominantly cater the credit needs
of women entrepreneurs and Self help groups.
Business plan of Mahila Bank?
1. By March 2014: 25 branches in capitals/major cities of India
2. 25% branches in unbanked rural areas.
3. By 2020: 700+ branches; 60k cr business
Software
as such most desi banks use finacle core-banking software designed by Infosys
But this Mahila bank got Core Banking Software by FIS (American Co.)
(^ya this type of GK essential for IT-graduates for the bank interview stage.)
Why Mahila Bank is mere publicity stunt?
(Interview Q.) Bharatiya Mahila Bank is a mere symbolic exercise for feel good
publicity. Do you agree? Yes/No and Why?
I already mentioned the Positive points 1 cr. loan without collateral, skill development
for women etc.
But in Group discussion/ interview, you need to be aware of the negative points as well,
in case the other party decides to play Devils advocate.
Mahila Bank is mere tokenism, without substance because:
1. SBI, PNB, BoB better suited, they have pan-India presence including in rural
areas. Govt. already majority shareholder. Could have launched the 1 crore
without collateral scheme without Mahila Bank.
2. 25% rural branching: duplication of effort.
3. In the first phase focus on state capitals and UT = real need of women financial
inclusion is in rural areas and not those big cities.
4. Mid-level executives all imported from BoB, PNB etc. such deputed staff
usually dont have or motivation to put their blood and sweat in making this new
bank successful. Their loyalty remains with their own parent bank only.
5. Theyre offering 4.5%/5% interest rate on savings account but pan India presence
necessary, otherwise customers wont feel attracted. Besides private banks like
Kotak already offering 6%
Visit Mrunal.org/Economy For more on Money, Banking, Finance, Taxation and
Economy.
URL to article: http://mrunal.org/2014/04/economy-new-bank-licences-bandhan-
idfc-bharatiya-mahila-bank-differential-bank-licences-bimal-jalan-committee-
narsimhan-committee-arguments-favor-bank-nationalization-historic-evolu.html
Posted By Mrunal On 17/04/2014 @ 17:02 In the category Economy

Mrunal New Bank Licences - Ready Revision Note For IBPS & UPSC

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Mrunal New Bank Licences - Ready Revision Note For IBPS & UPSC

Uploaded by

Copyright:

Available Formats

7/8/2014 Mrunal New Bank licences: Ready revision note for IBPS & UPSC

You might also like