The draft guidelines issued by the Reserve Bank of India (RBI) clarify some issues such as eligible promoters, corporate structure, minimum capital requirement, corporate governance and business model. While the paper lays stress on promoter shareholding and milestones to achieve a diversified ownership in fixed timeframe, it is also very focused on the purpose of the new banks, which is financial inclusion (FI) and the related business model. The new banks will have to focus on the unbanked geographies. The regulator has been urging banks to open rural branches and has incentivised the existing banks to open 25% of branches in the rural areas. The regulator has also mentioned strict action against new banks not following the stated business model. The impact of financial inclusion on the business model is immense as the model needs to answer questions like market size, cost of funds, viability, use of technology and efficiency in operating structure for the new banks to succeed. Banks have been working towards FI for the last five years or so. As on March 2011, a sample of 19 large and small sized domestic banks had an average of Rs600 crore credit outstanding for FI accounts. More importantly, of the total FI accounts opened, only 40% were found to be active for the last one year. Also, given the challenge that domestic banks would have had a head-start on FI initiatives, reaching the next delta of FI customer would become that much more difficult for the new banks. Assuming that the margin for FI business is currently zero and equal split in FI and other business and a conservative 200 basis points margin for other business, the overall margin for a new bank will be approximately 100/120 basis points. Including operating costs and technology investments will take the new banks longer to break even. Another aspect is the source and cost of funds, the new banks will face multiple challenges in sourcing low-cost deposits and will definitely have a higher cost of funds than the existing public sector and private banks. Could this lead to a situation where new banks have to issue securities to fund their business is question that every aspirant looks to need into. A lean, low-cost and efficient operating structure is almost a prerequisite and technology will have to be optimised to achieve success. Reengineering the business model might even lead to something very innovative emerging. Non-banking finance companies (NBFCs) operating in Tier 3 to 6 centres will find it much easier to face these challenges than a completely newly set up bank. However, they, too, would require RBI’s prior permission to convert branches to bank branches and comply with branch setup norms, as NBFC branches are very different from bank branches. Banking is a critical and important economic sector and rightly so the regulator is taking utmost care to make sure that the new banks are used for no other purpose than banking with a FI focus. Diversified ownership and exercise of regulatory control are essential conditions which will need to be fulfilled and seem to be the major concern of the regulator. The safeguards in terms of promoter shareholding, divestment milestones and corporate structure and restriction on NOHC from setting up a financial services entity for at least three years from the date of licensing send out a very strong message that only very serious players with well-thought out strategy will be allowed. It seems the new bank licences will be a staggered process and it may be 2-3 years before we see a new bank becoming operational and perhaps rightly so considering that banking is a responsibility as well as an opportunity.
DNA
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