'On tap' bank licences to boost competition

Banking structure has the scope for further growth in size, and is resilient enough to withstand shocks.

The banking system must be flexible and competitive to cope with multiple obje-ctives and demands from vario-us constituents of the economy and to reach the financial servi-ces to excluded segments. Our growth in gross domestic savin-gs and household financial savings is faster than the GDP grow-th (at market prices), calling for increased presence of banking.

Banking structure has both the need and scope for further growth in size and strength and resilient enough to withstand shocks and also promote financial stability. Reflecting large-scale expansion of branch network by banks over the years, population per branch fell significantly from 1,36,000 in 1951 to 10,300 in March 2015.

Commercial bank credit as per cent of GDP picked up steadily from 5.8% in 1951 to around 57.80%. Recognising the need for further expansion of banking, from April 2014, the RBI has granted 23 banking licences to new players: two universal banks (2014), 11 payments banks and 10 small finance banks (2015). With the failure of many investment banks during the global crisis, the universal banking model remains the dominant and preferred model in most of the post-crisis world.

On August 1, 2016, the RBI released guidelines on ‘on tap’ licensing of universal banks in the private sector for accepting applications for opening new universal banks. From “stop and go” model, now applications will be accepted on tap/ on-going basis to enhance competition, bring in new ideas and variety into the system, put competitive pressure on the existing banks and improve performance and efficiency. Eligible promoters  include resident professionals  having 10 years of experience in banking/finance at a senior level and existing non-banking financial companies (NBFCs) ‘controlled by residents’ with successful track record of 10 years.

Entities/groups in the private sector having successful track record of 10 years with total asse-ts of Rs 5,000 crore or more are eligible, if the non-financial business does not account for 40% or more in assets/gross income.

The requirement of Non-Operative Financial Holding Company (NOFHC) is not mandatory for individual promoters or stand-alone promoting/converting entities who/which don’t ha-ve other group entities. Individual promoters, promoting entities and converting entities that have other group entities, are permitted only through an NOFHC. A minimum of 51% of the total paid-up equity capital of NOFHC shall be owned by the promoter or promoter group.

The minimum paid-up voting equity capital shall be Rs 500 crore and shall have a minimum net worth of Rs 500 crore at all times. The promoters shall hold minimum of 40% of the paid-up voting equity capital (locked-in for a period of five years from the date of commencement of business) and the shareholding to be brought down to 15% within 15 years. The foreign shareholding would be as per the FDI policy. The shares are to be listed on the stock exchanges within six years of the commencement of business. The board of the bank should have a majority of independent directors.

The bank is precluded from having exposure to promoters/major shareholders (shareholding of 10% or more) who are the relatives of the promoters of the entities in which they have significant influence or control. The bank shall open at least 25% of its branches in unbanked rural centres (populati-on up to 9,999) and comply with the priority sector lending targets. The validity of the in-principle approval will be 18 months.

Post-liberalisation

Consequent to the recommendations of Narasimham Committee-I in 1991, the guidelines on new banks were released in 1993 with a minimum capital requirement of Rs 100 crore and 10 new private sector banks were licensed during 1993-94.

Again, in 2003-04, with capital requirement at Rs 300 crore, two banks (Kotak Mahindra and Yes Bank) were licen-sed. Further, in February 2013, fresh guidelines for licensing of new banks (with Rs 500 crore capital requirement) and later, another two licences (Bandhan and IDCF Bank) were issued.

Out of the first list of 10, four banks were merged with other banks: Times Bank with HDFC Bank (2000), Bank of Punjab with Centurian Bank (2005) and Centurian Bank with HDFC Bank (2008). The promoters of these banks could fetch good amount of money within a short duration. The Global Trust Bank was forcefully merged with Orie-ntal Bank of Commerce (2004).

Except the IDBI Bank, all other banks promoted by financial institutions [(ICICI, HDFC and Axis (UTI Bank)] continue to show exemplary performance. The other two (IndusInd and DCB Bank) do survive. Thus, the banks promoted by financial institutions continue to show excellent performance in terms of growth, size, profitability, adoption of technology, market capitalisation, containment of stres-sed assets and other parameters. Promoters of other banks (not all) could gain much by ‘selling’ their banks at a premium on their initial investments.

The current guidelines provide an exit window to the promoters after five years of commencement of business. Considering the history of the first 10 universal banks (licensed during 1993-94), it will be only fair be biased towards financial institutions while considering/ granting universal banking licenses under the present ‘on tap’ licensing of universal banks in the private sector.

(The writer teaches banking in ICICI Manipal Academy (IMA), Bengaluru)