Given India’s growing credit needs and poor spread of banking—almost half the country’s population doesn’t have access to banking facilities—it is just as well that the process of giving out new banking licences has reached the penultimate stage. The last time the Reserve Bank of India (RBI) gave out licences was 10 years ago; in the round before that, several licences were handed out but unfortunately there were also a couple of casualties. With the country’s credit needs expected to double every five years, on the premise that real GDP will clock 6-7% annually, India clearly needs new banks. This is not only because incumbents may not be able to attract new capital to grow, but also because the banking business hasn’t really spread as much as would have been desirable. Crisil’s Inclusix index—which measures penetration of branches, deposits and credit facilities—scored a relatively low 40.1 out of 100 for the three years between 2009 and 2011. This indicates that there are several sectors which probably aren’t able to access bank funding; while it is possible banks have a genuine problem reaching out to these sectors, the presence of institutions with expertise in specialised lending to service such markets might help—it is because banks don’t find it possible to lend to small borrowers, for instance, that microfinance institutions came up.
When the process of awarding new licences began, many were concerned about corporates getting licences, apprehensive they would indulge in “self dealing” even though RBI guidelines made it clear that enough checks and balances would be put in place. The “fit and proper” criterion was seen to be desirable in choosing the new bank licensee but many felt it would be difficult for RBI to apply this strictly given how many corporates have fallen foul of the law on different occasions—the fact that regulators such as Sebi allow consent decrees makes it more difficult to apply the criterion since there is no case against a firm entering into such decrees. The good thing is that the final list of 26 applicants for bank licences appears to have a good mix of large corporations with a good track record—the Tatas and L&T—and specialised lenders like an IDFC or a Shriram Transport. In Janalakshmi and Bandhan, you have players who work in the inclusion space and there are bankers of the calibre of former Citibank chief Vikram Pandit who could bring in some fresh ideas. RBI’s job in selecting candidates isn’t going to be easy—India Post, for instance, looks well-positioned to deliver on inclusion given its rural reach even though its track record is quite poor on various other parameters. The important thing, however, is that RBI has an impressive list to choose from. Meanwhile, even as new players come into the banking arena, the finance ministry and RBI would do well to facilitate mergers and takeovers; consolidation could bring about greater efficiencies.