Urban co-op banks may be next in line for licences

After an in-principle decision to give licences to two private sector entities, the Reserve Bank of India (RBI) is now preparing to give licences to urban cooperative banks in the next round.

According to official sources, the RBI is in the last leg of preparations for giving licences to these entities, which essentially lend to small borrowers and businesses, so that more people can get access to banking. The central bank will now have to discuss eligibility criteria of these entities for licences with the finance ministry before they are converted into full-fledged commercial banks.

Sources said RBI will discuss this on a priority basis with the new government which takes over after elections are over in May. The government and RBI have been in discussions on the issue of cooperative entities being given licences for opening up full-fledged banks.

RBI had in 2012 taken a step forward to give licences to urban cooperative entities, but private entities were somehow given priority. Only a few days ago, the RBI gave permission to two entities — IDFC and Bandhan Financial Services.

Earlier,  the Malegam Committee too had suggested that UCBs play a useful role and there is need for a greater presence of UCBs in unbanked districts and centres with populations of less than 5 lakh people.

“It is necessary to encourage new entrants to open banks and branches in states and districts which are unbanked or inadequately banked. It is equally necessary to discourage new entrants from opening branches in districts and population centres which are already adequately banked,” the Malegam Committee had recommended.
The spotlight is set to shift once more to cooperative banks. “Some laws which need to be amended before announcing licences for new banks will be taken up only after the new government comes to power,” sources said.

Analyst say that in India the licencing window for new banks is not opened often. After nationalisation of banks in 1969, RBI first allowed private banks to set up shop in 1993. India’s largest private sector bank ICICI Bank and HDFC Bank started operations at that time. The last permits for new banks were issued in 2004, when Yes Bank Ltd and Kotak Mahindra Bank Ltd were established. IDFC and Bandhan are starting operations a decade later.

According to the World Bank, India has less than seven bank branches per 100,000 people, compared with 30 for the same number in developed countries.