The Reserve Bank of India (RBI) has decided to grant “in-principle” approval to two financial services companies – IDFC Limited and Bandhan Financial Services Private Limited – to set up new banks in the country.
LIC Housing Finance, Edelweiss, IFCI, Indiabulls Housing Finance, Magma Finance, Muthoot Fincorp, India Infoline, JM Financial, Aditya Birla Nuvo, Bajaj Finserv, Shriram Capital, Religare Enterprises, Reliance Capital, SREI Infrastructure Finance, L&T Finance and Janalakshmi Financial Services were among the 25 companies who had applied for new bank licences but failed to make the cut.
IDFC counts amongst its shareholders private equity investor Actis besides Khazanah and Government Pension Fund Global, the sovereign wealth funds of Malaysia and Norway, respectively. Bandhan, a micro finance company, is backed by IFC and SIDBI.
According to RBI, these two applicants were also recommended as suitable for grant of “in-principle” approval by the High Level Advisory Committee (HLAC) set up by the RBI. The HLAC had also recommended that in the case of Department of Posts, which has applied for licence, it would be desirable for the RBI to consider the application separately in consultation with the government. The RBI has accepted the recommendation of the HLAC.
RBI said on Wednesday that its approach in this round of bank licences could well be categorised as conservative. “At a time when there is public concern about governance, and when it comes to licences for entities that are intimately trusted by the Indian public, this may well be the most appropriate stance. Going forward, RBI intends to use the learning from this licensing exercise to revise the guidelines appropriately and move to give licences more regularly, that is, virtually ‘on tap’,” it said.
RBI will also frame categories of differentiated bank licences, building on its prior discussion paper, and this will allow a wider pool of entrants into banking. It added that some of those entities who did not qualify in this round for a full-fledged banking licence could well apply in future rounds or could apply for differentiated licences under the proposed framework.
The “in-principle” approval granted to IDFC and Bandhan will be valid for a period of 18 months during which the applicants have to comply with the requirements under the guidelines and fulfil the other conditions as may be stipulated by the RBI. On being satisfied that the applicants have complied with the requisite conditions laid down by the RBI as part of “in-principle” approval, they would be considered for grant of a licence for commencement of banking business. Until a regular licence is issued, the applicants would be barred from doing banking business.
RBI had issued guidelines for licensing of new banks on February 22, 2013. Originally, the central bank had received application from 27 companies. However, Tata Sons Ltd and Videocon Group’s Value Industries Ltd decided to withdraw their application later.
The HLAC was set up on October 30, 2013 chaired by former RBI Governor, Bimal Jalan and comprising three members (C B Bhave, former Chairman, SEBI; Usha Thorat, former Deputy Governor, RBI; and Nachiket Mor, Director, RBI Central Board) to screen the applications, and to recommend licences only to those applicants who comply with the guidelines. The HLAC submitted its recommendations to RBI on February 25, 2014 for its consideration.
The RBI assessed the quantitative and qualitative aspects of the applicants including analysis of the financial statements of the key entities in the group, 10 year track record of running their businesses, proposed business model for the bank as well as the applicants’ demonstrated capabilities for running a bank, plan for expanding inclusion, and culture of compliance and integrity demonstrated by the applicant in its past activities. Based on all this, the RBI took a view of the “fit and proper” status of the applicant.
The decision to grant “in-principle” approval has been taken after consulting the Election Commission, given that the Code of Conduct for the coming elections is in force.