IDFC, Bandhan get bank licences; big biz left out

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DoP may make the cut; RBI says next round soon

IDFC, Bandhan get bank licences; big biz left out
The Reserve Bank of India (RBI) on Wednesday picked only two players from among 25 applicants — infrastructure financing firm IDFC and Kolkata-based microfinance institution Bandhan — for granting new bank licences, leaving aside all the corporate applicants.

A third aspirant, India Post, may still make the cut, as the central bank has agreed to consider its application in consultation with the government.

The other applicants, too, can apply afresh when the central bank comes out with fresh guidelines to grant bank licences ‘on tap’, RBI said. The new licences came a decade after the last permit was issued to YES Bank in 2004.

Some of the country’s top corporate houses like Reliance Adag, Aditya Birla group and L&T Finance were among the applicants that failed to make the cut. The Tata group too had applied, but withdrew its application subsequently.

IDFC is a Mumbai-headquartered non-banking financial company set up by the government in 2005 as a specialised agency for infrastructure lending.

Deepak Parekh, who was the chairman of IDFC for 15 years and headed the IDFC advisory council, said: “I am delighted. It is a much-awaited decision.”

Parekh felt the licensing process was a bit restricted. “We should have more players,” he said.

RBI’s in-principle approval is valid for 18 months, during which the applicants must comply with the requirements under the guidelines.

“On being satisfied that the applicants have complied with the requisite conditions laid down by RBI as part of the ‘in-principle’ approval, they would be considered for grant of a licence for commencement of banking business under the banking regulation Act,” RBI said in a statement.

Until a regular licence is issued, the new licensees would be barred from doing banking business, it said.

IDFC managing director and chief executive officer Vikram Limaye said they have already done a lot of ground work in terms of liabilities, capital branding, product positioning, HR-related issues and the technology required to set up a bank. “On the capital front, we have sufficient funds. But we need to do some work on transitioning our borrowings and also our assets,” he said.

The government has a 17 per cent stake in IDFC, while Singapore-based sovereign wealth Khazana holds 10 per cent, Life Insurance Corporation 4.2 per cent and other FIIs about 53 per cent.

The second player, Bandhan Financial Services, is India’s largest microfinance institution (MFI). Chairman and managing director Chandra Sekhar Ghosh said the bank licence would add more teeth to its MFI operations and operational efficiency.

“The board of Bandhan will meet in a day or two to draw up the future course of action. RBI has given us 18 months. But we give ourselves 12 months to put everything in place and prove ourselves,” Ghosh told Financial Chronicle.

Bandhan works in unbanked areas across 19 states and Union territories through a network of 1,864 branches catering to over 4.8 million poor women with a dedicated workforce of about 12,300. It has a 25 per cent market share of the MFI sector’s overall loan portfolio.

“After getting the licence, our main task will be to create a client base and ensure its protection. Deposit mobilisation will definitely be a new area of work,” Ghosh said.

Some observers said the central bank played it safe, while others felt RBI might be uncomfortable to hand out licences to many private sector firms due to governance issues.

The central bank said as much in its statement. “RBI’s approach in this round of bank licences could well be categorised as conservative. At a time when there is public concern about governance, and when it comes to licences for entities that are intimately trusted by the Indian public, this may well be the most appropriate stance.”

Ashwin Parekh, partner and national leader at Ernst & Young, said, “It is a good approach to begin issuing licences to just two or three players. It is prudent not to give it to too many players, considering the recent governance issues in the coal sector and the related complications that RBI wanted to avoid.”

The central bank said it would soon set in motion a process for both ‘on tap’ licensing and differentiated licensing.

“Going forward, RBI intends to use the learning from this licensing exercise to revise the guidelines appropriately and move to give licences more regularly, that is, virtually ‘on tap’. It will also frame categories for differentiated bank licences, building on its prior discussion paper, and allow a wider pool of entrants into banking,” the statement said.

RBI believes some of the entities that did not qualify for full-fledged banking licence in this round could apply in future rounds or could apply for differentiated licences under the proposed framework, it said.

To evaluate the bank licence aspirants, RBI scanned financial statements of key entities of every group, checked 10-year track records of running businesses, reviewed the proposed banking business models, the applicant’s demonstrated capabilities for running a bank, its plan for expanding inclusion and the culture of compliance and integrity demonstrated by the applicant in its past activities.

Based on this exercise, the central bank took a view of the ‘fit and proper’ status of every applicant. RBI also consulted the election commission before announcing the decision to grant the ‘in-principle’ approvals, as the election code of conduct is in force.

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