Column : Interesting banking times ahead

Feb 23 2013, 02:12 IST
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SummaryRBI bars new banks from lending to promoter group companies which takes care of regulatory concerns.

The much-awaited norms for awarding new bank licences are out and RBI has been judicious and pragmatic in laying down the criteria. The field is open to anyone with a good track record who can bring in the necessary capital of R500 crore and falls in line with priority sector lending and meet the inclusive banking norms of having 25% branches in unbanked areas (population of less than 9,999). Further, they can neither lend nor have investments of any sort to the promoter groupwhich eschews the concern on whether a business house will direct funds through the bank to its own group. The promoter has to be in for 5 years and go in for a listing within 3 years, and can start with 40% holding, which will be down to 15% after 15 years. Foreign money can come in, but it will be up to 49% to being with.

RBI should be commended for opening the doors and adding caveats to ensure that there is no misuse of the licence and that they operate on a firm footing, which is in line with the objectives of banking in the country. There are really two questions that can be put up for debate. The first is whether this is good enough for private capital to flow in. The second is whether this will change the architecture of banking in the country.

Any entity seeking to enter this field would consider first the preconditions that have to be met. There are two issues here. The first is whether money can be made and the time taken to earn it. The norms laid down are quite tough as the initial capital is high and the commitment to priority sector lending along with the branch location in rural areas can be a dampener. The CASA deposits are attractive, especially for an NBFC waiting to enter the arena. But the restrictions on lending to ones own group can come in the way, especially so when the promoter group is large and the companies involved are also large and demand credit from the system that cannot be catered to. This can be a dampener for themespecially for conglomerates who have diversified interests.

The second is business prospects. When the first set of new private banks was allowed in the 1990s following the recommendations of the Narasimham Committee, the field was restricted in terms of technology and regulation, which was overcome by the introduction of new banks. They added a new dimension through an array of products for both deposit holders and borrowers, which worked well as can be seen by their position today. Costs were reduced and efficiency norms permeated through the public sector banks, which learnt to compete on an equal footing. While the institution ones dominate the banking space today, the others had gotten assimilated into the system, barring one bank, which continues to do well, belonging to a corporate group. The challenge for the new banks is to bring something new on the table while complying with the RBI norms on inclusive banking. Here, NBFCs converting to banks will have an advantage as they have structures that can be easily put in place and they could take the benefits on the deposits side.

The second macro-based question is whether this will change the landscape of banking? Do we actually need more banks? Currently, banks are well-capitalised and could cater to the requirement of growth in credit of 20% per annum if we are to walk the road of 8%-plus GDP growth. Having more banks will mean more capital coming in. But assuming that there would be no more than 4-5 players to begin with, will R2,000 crore of capital be good enough? Also, cant the same amount be raised by the existing banks? If the government is not willing to divest in public sector banks, then there will be enough latitude for the new ones. The existing private banks could probably only partly meet the requirement. Therefore, more banks should be good for the system.

But, will it increase the overall reach of the banking system? The answer is a shoulder shrug here as most banks are concentrated in the top 200 centres. The RBI data shows that 74% of deposits and 82% of credit is concentrated within this perimeter. This being the case, more new banks in new rural areas may not serve much purpose, and even if they do, at the incremental level, the amount garnered would not be significant though access could be provided. We already hear complaints of banks that have opened branches that are not viable. In fact, some have also closed down branches on this score. Therefore, will new banks be getting into a rut where we force them to open branches in places that are not viable and have to be closed down subsequently? It is hard to conjecture right now.

Nonetheless, we will see some interesting times ahead. NBFCs will be eager to get out of the NBFC trap and move over to banking given the limitations that are there for their own current line of activity. The corporate houses will find this interesting, though blunted by the norm on connected lending. The private banks will feel the heat of competition increasing in the high-banking centres as new players always provide some incentives to customers, which have to be matched. The government has to take a call on capitalising the public sector banks, and we can hope to see considerable divestment, which will be the way to go given the pressure on the fiscal balances to recapitalise these banks. Foreign banks may not be expected to join the fray in any way and would probably tend to follow a wait-and-watch policy before taking a step forward.

Quite clearly, there will be quite a bit of action on this front. As the economy will take time to pick up and grow, the first couple of years would witness more competition, which, in a way, is the right way to go.

The author is chief economist, CARE Ratings. Views are personal

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