Monday, April 29, 2013

RBI expects over 2 dozen contenders for bank licences : Department of Posts one of them

Dear Comrades,

With the Reserve Bank of India (RBI) expecting a little over two dozen applications for new bank licences before the July 1 deadline for new applications, the government does not intend to restrict the number of licences to be issued by the central bank.

“There is no limit and we have not fixed any number for issuing licences,” financial services secretary Rajiv Takru said.

He said, a clearer picture would emerge regarding the number applications closer to the deadline, and government is clear that it did not want to restrict the number of new banks to four, five or half-a-dozen.

Many corporate houses, including the Tatas, the Birlas and Reliance, have evinced interest in entering the banking business. The Reserve Bank of India is expected to favour players with pan-India presence such as L&T, Reliance, the Tatas and Mahindras, apart from state-owned companies like Life Insurance Corporation (LIC).

Certain regional players, which have been successful in running non-banking finance companies like Sriram Finance, Sundaram-BNP Paribas and SREI are also likely to be among the frontrunners for new banking licence.

The finance ministry has already announced setting up of a public sector bank for women. This, however, will not come under the purview of new banking licences. The all-women bank would require a licence and other clearances from RBI, but would fall under the category of public sector bank, for which licensing norms are different and will not be governed by the guidelines issued for new bank licences, which are mostly for the private sector.

Takru said it was for the postal department to decide if they wanted to apply for the India Post Bank under new bank licensing regime. They qualify for applying under the new guidelines, he added. He also said it would be great if India Post decided to run a bank and it would go a long way in fulfilling the government’s financial inclusion programme, as the department of posts covered every nook and corner of the country.

India has over 150,000 post offices, which meant one post office for every four villages, where most of India’s population still lives.

A special report by Fitch India ratings and research on new bank licences said new private sector banks accelerated the banking sector’s productivity during the 2000s, forcing older generation banks to follow suit. However, the improvements now seemed to be plateauing, and new players with innovative approaches were needed to catapult the industry to the next level, through induction of fresh capital, further improvements in productivity and greater credit penetration.

Noting that rural banking was the key, the report said while bank credit to the commercial sector had increased in the past two decades, rural credit growth had lagged due to low economies of scale and volatile credit costs.

The RBI guidelines for new bank licences have made financial inclusion and rural banking a dominant theme. India Ratings believes that financial inclusion offers banks long-term growth prospects and the key to sustained profitability, including access to a large pool of low-cost saving accounts.

However, an innovative business model backed by suitable technology may need to be developed by players familiar with the non-urban markets, it said.

The finance ministry, which had done an internal study a couple of years ago was, however, not in favour of the department of posts being converted into a bank, saying it did not have the wherewithal to run a bank as the employees were basically government babus, who did not have the necessary and specialised skills.

With the parliamentary standing committee recommending the conversion and department of posts keen to set up an India Posts Bank, finance ministry is making a second assessment in this regard. One proposal is to separate postal small savings schemes from banking operations.

The corpus of small savings scheme has grown to over Rs 5 lakh crore, which is believed to be larger than the deposits with State Bank of India or ICICI. But they are sovereign guaranteed funds and were not similar to bank deposits.

Jyoti Prakash Gadia, managing director of Resurgent India argues that a key USP for starting a bank by India Post is its 150,000 branches and there is merit in putting this network to effective use, particularly in realising the financial inclusion programme of the government.

Another synergy to start a bank could be the captive savings and other deposits existing with the post offices, he said, adding positives outweigh negatives in converting department of posts into a bank.
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