NEW BANK LICENSES

Submitted by Bhumi Shah 07 Geeta Honrao 10 Siddhartha Shetty - 27

MAJOR PROSPECTIVE PLAYERS

Tata Group Aditya Birla Group Reliance Group Shriram Group L&T Finance Holdings Ltd Religare Enterprises Ltd Bandhan Financial Services Pvt. Ltd LIC Housing IDFC Bharti Group Mahindra and Mahindra Financials

IS IT THE NEED OF THE HOUR?

India has 96 scheduled commercial banks (SCBs) 27 public sector banks 31 private banks and 38 foreign banks having a combined network of over 53,000 branches. SBI ranks 60th globally in 2012 in terms of tier I capital (equity + reserves). Once all its subsidiaries are merged with it, it would be among the top 10 banks in the world in terms of various parameters. The second largest bank (in terms of loan book) ICICI Bank's position is way below at 110. Consolidation should be the ideal solution to it, not new banks. India should have 4 or 5 global-scale banksRamnath Pradeep, former chairman of Corporation Bank

POSSIBLE IMPLICATIONS ON EXISTING BANKS

The sectors margins and ROEs are likely to decline, including those of existing private banks. Considering that the larger private banks still have just about 5percent market share each, they can still grow at around sector growth levels of 1718percent.

VIEWS BY EXPERTS

One of the key principles of the guidelines, is to ring-fence financial services businesses of banks and their promoters from The new banking guidelines are balanced and pragmatic The prudential measures in a the licensing guidelines the risks of group entities of promoters. It is ensured that new approach on the RBI's part, as it allows a broader set of entities in banks will be (minimum focused on pure banking and financial activities that are lauded capital adequacy ratio of 13 per the banking sector , besides ensuring maximum prudential are insulated from any group influence. To reduce undue cent) norms to avoid any systemic risks. influence of a single promoting individual, a wider shareholding has been encouraged(10%cap)
CARE Analysts PWC Financial Sector

POSSIBLE PROBLEMS OR ADVERSE IMPACTS

RBI has put a stricter condition of having 25% of branches in unbanked rural areas with population up to 9,999. It will be stumbling block as the brick and mortar model especially in rural areas take time to turn profitable. Priority sector lending of 40% Reducing the holding to 15 per cent within 12 years. Going rural- As businesses penetrate the rural areas, the personnel costs become too high compared to the business generated If the new banks are expected to do business with a client segment that is much less remunerative, it is going to put a larger burden on them. Tradeoff -financial inclusion v/s profitability

RBI MEASURES TO DEAL WITH ABOVE RISKS

Retaining its right to refuse a banking license on any grounds and seeking impeccable integrity of the promoters Maximum prudential norms to avoid any systemic risks. Getting them listed within 3 years of operations. 49 % cap on foreign holding RBI has ensured adherence to financial discipline by stipulating the promotion of new banks by a non -operative financial holding company (NOFHC) in the form of a Non -Banking Financial Company (NBFC) To safeguard the interests of deposit holders from any diversion of funds towards corporate houses, the holding company and the bank will not have any exposure to the promoter Group. The bank will be prohibited from investing in any financial subsidiaries within the NOFHC.

POSSIBLE POSITIVE OUTCOMES OR BENEFITS

Banks will focus on reducing their operational cost which might result in charging lower interest rates to consumers in the long run. If NBCFs are given the preference to run a bank, then rural and semi-urban consumers will be most benefitted. When banking license will be awarded to NBFCs, their cost of deposit will be substantially reduced the benefit of which may trickle down to the customers in semi -urban and rural areas. More strategic tie ups can be seen with micro -finance institutions which may help to broaden the reach of banking in several villages. SMEs and small borrowers operating in Semi -urban or rural areas might get access to cheaper loans as more and more banks expand their network in the face of intense competition

 Emerging middle class which is between the middle class and the financially excluded is where most of the new bank license aspirants are already present (by way of different businesses). RBI and Basel guidelines will ensure that new entrants are solidly capitalized and our existing prudential norms give enough protection against lending to a single business conglomerate. So this will infuse greater competition in the sector and perhaps a little volatility. A few not -so-wellperforming public sector banks may suffer. But on the whole, it will increase efficiency in the sector. Srei Finance, an NBFC, said it had a strong presence in rural areas through sahaj kendras (about 28,000 of these). This will give an edge to reach people outside the ambit of financial services. It is among those having shown an interest in applying for a banking license.

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