Is Rajan in a hurry?

ON-TAP BANK LICENCES

The number of measures that Governor Raghuram Rajan has taken, after he took office in the Reserve Bank of India are many and varied. He is constantly talking down to the government on inflation and its fiscal management and managing the monetary policy. He is also addressing multiple sets of issues – ranging between internal reform and restructuring of the RBI.

Rajan has set the ball rolling in granting licences for new differentiated banks and set up draft guidelines for regulating peer to peer lending. In addition, he is opening up many avenues for the younger generation to engage with the issues that RBI would be interested in – whether it is through essay competitions, internships or other outreach programmes. Rajan is also visible almost on a daily basis explaining and communicating the rationale of his vision through every occasion and forum available to him, whether it is a memorial lecture, a convocation address or a press interaction, effectively communicating his methods.

Clearly, there is a lot that Rajan has done in the small 30 month window he has been in. There is much speculation whether he would continue beyond his term on to an extension or not. But that is not germane because what Rajan has done till now will leave his imprint for a long time to come. While all initiatives he has undertaken appear to be done with great speed – much like a CEO would have managed a corporate – it would take time to get many of these initiatives to start making impacts. In that sense, it is important for Rajan to be ahead of the curve. While Rajan is more pro-markets than his predecessors, his stand is tempered by the concern for inclusion and caution.

One of the most important announcements that the Rajan regime made in the recent past is that of posting a set of draft guidelines for granting on-tap licencing for commercial banks in the private sector. What does this actually mean? It just means that Rajan has delivered on his promise, but will it result in something exciting?
By announcing this, he has removed the drama, mystery (and possibly lobbying) around the events of announcements of small windows of accepting application forms and granting licences. Is it radical? Not really. But it does a lot of good to the belief that the rules of the game are there, for everyone to see. It ensures a path for somebody aspiring to be a bank. But will we see many banks come up in the near future because of this regime? Not really.

The last time the RBI opened up the window for bank licences there were 25 applicants in the race, with another 2 who had applied, but withdrew their application when the process was on. Three of them re-applied for a licence to open small finance banks (SFB), one of which – Janalakshmi Financial Services – was granted in principle licence for an SFB. It might take a couple of months before the draft guidelines are finalised and a standing external advisory committee to be announced for the on-tap licencing process. After that is done, what do we expect?

Barred from applying
The draft guidelines indicate that the applicants whose licence was rejected are barred from applying for a licence again for a period of 3 years. Would that apply retroactively? If that is the case, none of the applicants who did not make the cut in 2014 can come in before April 2017. The guidelines though not explicit, keep large diversified industrial houses out by indicating that the income and/or assets from non-financial business should not be more than 40%. The initial capital requirement is Rs 5 billion, and a track record of 10 years. These filters along with the bar on re-applying, will shrink the potential base of qualified firms/individuals who would apply to a very small number.

It appears that there is a subtle change between the earlier guidelines and the current ones in terms of the nature of domestic shareholding. While the earlier guidelines seemed to indicate that at the time of promotion the promoting entity should not only be owned, but also controlled in majority by residents, the current guidelines seem to suggest that subject to the FDI norms, the residency condition would not be applied at the time of application. This is indeed a big shift and whether this aspect is tucked away in further fine print at the time of final guidelines is to be seen.

Be that as it may, the point is that there are not many entities out there that can jump through all the hoops and still make it. Even if there were a dozen or so applicants who are qualified, many of them may not want to subject themselves to the stringency of a bank. The likes of the Shriram and Mahindra group may not want to trade their flexibility to strict norms of liquidity requirements, priority sector targets and sub-targets without any regulatory forbearance during the transitionary period.

Therefore, in spite of all the euphoria around the release of the guidelines, the net effect might actually be about 2 or 3 new private sector banks on the ground by 2019-20. This number is no significantly better than the 2 banks that have come in 2003-04 and 2 in 2014-15, the time period might get adjusted to around 8 years instead of the 10 year horizon.

In any case, Rajan would just have set the ball rolling and unless he is granted another term, he would not be there to see these new banks roll out. If we were to look at the Rajan legacy, we may have to look at the SFBs and the Payments Banks rather than the on tap licences as his contribution.

(The writer is Visiting Faculty, Centre for Public Policy, IIM-Bangalore)