In the Union Budget 0f 2010- 11 the Honorable Finance Minister had announced that additional banking licenses would be given by RBI to private sector players inclusive of NBFCs. This was ostensibly to further financial inclusion and also to improve Indian Banking systems size & sophistication. This had set the capital markets on fire with a lot of conjecturing as to who would be the lucky few. The access to low cost current account & savings accounts ( CASA) and ability to offer all financial products under one roof (Universal Banking) attractions for NBFCs to rush to seek banking licenses. It was also expected that RBI would give new licenses to private players very soon. However the scenario on the ground reveals a totally different picture. Neither is RBI in a hurry to issue fresh licenses nor is there a mad rush by many NBFCs to get into commercial banking. The reasons are as outlined below: Restricted Freedom Due To Banking Regulations: RBI rules are stringent for commercial banks as they are the visible face of the Indian Financial system. Another reason is the fact that commercial banks are primarily custodians of public money. RBI places restrictions on commercial banks in their lending operations. Out of Rs. 100 taken in as deposits approximately Rs. 30 has to be set apart as statutory requirements towards Cash Reserve Ratio ( CRR) and Statutory Liquidity Ratio (SLR). This leaves the Banks Rs. 70/- to lend. Out of this Rs. 70/- forty percent has to be statutorily lent towards priority sector as defined by RBI. That essentially leaves banks with Rs. 42/- to lend as per their own discretion. Many NBFCs would definitely restrictive to say the least. NBFCs seeking a banking license are expected to have huge capital requirements. Further Banks have to invest large funds in fixed assets and information technology primarily to facilitate financial inclusion, risk management anti money laundering, etc. These huge capital expenditures increase the payback period for the investments made. Also banking as a business model is far more people, process and product driven than a simple NBFC model. For example in order to adopt Universal banking the staff needs to be multi skilled in banking functions. Thus the operating expenses would be substantially higher, which in turn would reduce the profitability of operations. Also there ownership and voting rights. Current stipulations cap voting rights at 10% unless with specific approval of RBI. Thus in light of all these restrictions, it is clear that commercial banking is a far more regulated and complicated business model. This explains the lukewarm response of many NBFCs. Past Experience explains RBI's cautious approach At the same time it is clear that RBI is in no hurry to issue new licenses. The last license was given in 2004. However since then, India has changed a lot and the world has changed a lot. More importantly the world view on Banks has changed a lot. Also RBI has to take into account the past experience of giving licenses to new private players. licenses to nine players. Post 2001, RBI further gave banking licenses to Kotak Mahindra and es bank Of these four do not survive today. Global Trust Bank ( GTB) has been merged with Oriental bank of Commerce (OBC), Times Bank was merged with HDFC, Bank Of Punjab with Centurion Bank which itself has been merged with HDFC Bank. Thus out of eleven new banks, four have failed ( a failure ratio of above 35%). A key lesson of the recent financial crisis is that each time a bank fails it erodes the faith in the system which might eventually lead to a systemic collapse. This explains RBI’s reluctance in handing over licenses liberally. In particular the comment on the current world view of the Banks is telling. To say the particular are viewed with suspicion due to their ownership. The last thing that RBI would want is banking failures which would undermine the stability of our financial system. It is thus clear those only serious NBFCs with deep pockets and who have a differential operating model would seek banking licenses. Also RBI would be in no hurry to issue these licenses.In the context of new branch licenses baby steps are far better than giant leaps. This is because it is better for RBI to prepare & prevent than repair and repent.
FPJ
