New Bank Licences: Silver line in dark clouds

After scrutinising the applications for new bank licences on various aspects, last week Bimal Jalan panel has submitted its report to the Reserve Bank of India (RBI). Yes, this year RBI is planning to issue few new licences to some new players in Indian Financial system. The Central bank issued guidelines regarding licensing of new banks last year. This is the first attempt of licensing in last one decade since Yes Bank and Kotak Mahindra bank were entitled with suffix “Bank” against their name in 2003-04.

Banking system is core of any economy and banks its backbone. Strengthening this sector by providing new licences gives an edge over the existing one. As many as 25 players are in fray of banking licences which includes public sector player like India post and IDFC and private sector Anil Ambani group and Aditya Birla group. Few NBFCs (Bajaj Finance, Muthoot Finance etc) are also competing for new licences.

Public player like India post have greater chances of entitled with banks because of its strong nationwide distribution channel specifically in rural India and having experience in administrating a saving bank scheme and accepting PPF deposits.

Probability of NBFCs getting licences is also high, as these are already in financial business. If NBFCs are given preference to run a bank, then rural and semi urban consumer will be the ones who get maximum benefit because of their already existing network in rural areas. As NBFCs cannot take deposits their cost of funds are high as compared to banks. But when NBFCs are awarded with banking licence their cost of fund will plunge to the comparable cost prevailing in market.

As more players enter the banking space, intense competition among banks might benefit consumers. Banks will focus on reducing operational cost to maintain their market share or to consume market of others which in turn will result in charging low interest rates to consumer in long run. This competitive environment in banking system not only bring down the interest rates but also innovate the whole banking system with new people coming in with their new idea, new thinking style and with new strategies which make system work more efficiently.

India has population of over 1.2 billion of which only 35 percent of population has their bank account. To penetrate more in market, RBI made it mandatory for banks to open “One ATM in rural area with every three in urban area” and bank licences to new players will perform the task of catalyst in reaching out to remaining 65 percent of population which ultimately support the primary objective of penetrating the untouched market to greater extent.

The step taken by RBI is seen as “Silver line in dark clouds (which is hovering on Indian Banking System)” to strengthen Indian Banking system. This gives hope to many economists or to experts regarding expanding reach of Indian banks which make every penny countable and support untouched market to grow if implementation is done properly rather than mere hype.