“Creation of banks and new licenses: is the time appropriate”

The government of India in all its wisdom has decided to issue new bank licenses for industrial micro finance leasing etc., companies provided they meet the stringent criteria developed by the Reserve Bank of India. India is a greatly under banked country and it is the intention of our government to create new banks and make their services available both the rural and urban population. As per the press release 26 aspirants have made their applications. Mr. Mahapatra, ED of RBI mentioned at the recent NIBM conclave that the number of banks to be created is not prefixed. As long as they meet the RBI specific requirements such as the CRR, SLR etc which the existing banks are currently required to meet, he said that the licenses will not be difficult to obtain.
Mr. Mahapatra’s presentation revealed many facts about the Indian economic scenario. According to him there are about 90 banks which belonged to either public or private sector. Together they have 1 lakh branches across India and their branches are located both in the urban and rural areas. The new banks when licensed will compulsorily have to open branches both in the rural and urban areas. The participating audience asked questions mostly on the RBIs intention, objective, procedure to license, the governance and transparency in selection. The following are some of the questions and relevant answers
1. What is the existing coverage of the banks?
India has a population of around 125 crores with the current number of branches equal to 100000. So we have now a bank for every 12500 people. The government is desirous of bringing this down to say one bank for every 10000 people.
2. What are the chances of micro finance companies to upgrade themselves to a bank?
Presentations were made by at least 2 micro finance companies about their need to become a bank and how as a bank they will be able to serve lot more rural residents. Bandhan is a micro finance company initiated by Mr. Ghosh. He spoke at length about the services rendered by the company and its economic viability. The data presented by him spoke volumes of how well they are managing the resources. Practically no non-performing assets, ever growing clientele base, increasing and new financial products and their continuous effort to catch up to the needs of rural society.
3. Will license be issued similar companies?
According to RBI, if they can meet their stringent rules, there is a good possibility.
4. Should this be the right time to address the issue especially when the national election is only a few months away?
Recognising the existence of under banking is good any time. Following up with an action plan is even better.
5. There are a number of industrial houses who have made applications. What are their chances?
The RBI said that as long as they meet their stringent criteria, they should be eligible to be considered. Of course they are required to open a certain number of minimum branches in villages as part of the requirement.
6. One of the fears expressed is whether these banks created by the industrial house will become similar to a chaebal of South Korea. Will this be the case in India?
While the concern is relevant, RBI said that it has ring fenced the selection process. The industrial house selected to start a bank will go through severest of scrutiny before the license will be given. By the way chaebal means conglomerate of business usually owned by a single family. If the bank is owned by a single family who is extraordinarily rich and who have many industrial activities. The bank may then be more concerned of the financial needs of the companies who are in the group rather than serving the community at large.
7. Already big banks in India have invested heavily in selected companies. According to a report nearly 80% of all bank loans have been given only to a handful of companies. With this RBI exercise result in anything different?
The mobilized savings from the society, if social inclusion is the one objectives, should be in the hands at least some micro finance companies who can then reach out to more rural people and help them in providing the working capital. This way the massive unemployment faced by our country may somewhat be eliminated.
8. Finally is the right time to considering issuing of new licenses?
Some facts are to be pondered before any meaningful conclusions can be reached. They are
(1) Indian companies have borrowed US 146 billion (ECB) from overseas. With the declining value of rupee these companies may face severe challenges as the effective rate of borrowing have sky rocketed. This may put a severe strain on banks as some of these companies may actually default.
(2) With the RBI increasing the repo rate is likely continue for a while until the rate of inflation is tamed. This will create a liquidity squeeze. With very little credit expansion the new banks will have to scout for deposits in this tightened environment. If they did this by increasing the FD rates, they will squeeze the existing banks of their deposit lending ratio.
(3) According to the data released by RBI between restructured loans and NPA nearly 10% of all loanable funds are locked up. They together amount to 4.1 trillion rupees. With the economy slowing down this is bad news for the banks as the prospects of recovering the debt will be a big challenge.
Thus the question to debate “why take up this issue of issuing new licenses when the existing challenges faced by the banks is already overwhelming”.

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