You are on page 1of 2

How far can new banking licenses be banked upon?

By Vaibhav Aggarwal

Financial inclusion has been the priority of the government since quite some time. In order to achieve its target of total financial inclusion in the country by March 2011, the government has been adopting several steps. Amongst them was the proposal given by Finance Minister, Pranab Mukherjee during Budget 2010-11 that new banking licenses be granted to eligible corporates and non banking financial companies (NBFCs). Banking regulator, Reserve Bank of India has been working on the issue for some time and has come up with draft guidelines for issuing fresh banking licenses. The two major contenders in the race are NBFCs and corporates. NBFCs' already come under RBI regulation and that could prove to be a plus point for them but there is quite some difference in the level of strictness in regulation for banks and NBFCs. The fact that the level of regulation is quite less for NBFCs than banks might pose an issue for these companies in getting a bank license. Adequate capital requirement is an important criterion to be eligible for obtaining a banking license. This is because an entity with strong capital base can aid better to the goal of financial inclusion. If that be the case, then corporate houses stand a fair chance of getting selected in the race. But a disadvantage associated with handing a license to them lies in the fact that they might get biased towards their respective associate companies and subsidiary units and give lesser priority to other clients. Also, there is a clause that any corporate house dealing in the realty sector cannot enter the banking segment.

The draft guidelines proposed for new licenses suggest the capital requirement for companies to be eligible has to be in the range of Rs 300 crores to Rs 1000 crores. However, a problem with this low capital requirement slab may be the fact that it would allow even those firms to compete in the race which do not have sufficient capability to invest in technology and technology is a very important aspect of financial inclusion. Considering the issue of promoter's shareholding, RBI has proposed that promoter's shareholding should be inversely proportional to equity base; that is with increase in equity base, promoter's share holding should decrease. Thus the apex bank has many corners to look at before arriving at a final guideline for the issue. But whatever the guidelines are for the new entrants, their entry would increase competition in the market. Increasing competition is expected to benefit the customer.

Banks have to reduce their operational costs in order to sustain to rising competition. Bank license to NBFCs is likely to be favorable for financial inclusion as these companies have a strong presence in rural and semi urban areas. Once they get a banking license, they will be able to take demand deposits which are otherwise not allowed to them. This would act towards reducing the cost of funds for these NBFCs. This is expected to make loans cheaper for the SMEs and cheap borrowers. These prospects seem to be lucrative especially for the rural and semi urban customer base.

You might also like