The last time RBI had issued banking licenses was 2004; Kotak Mahindra Bank and Yes Bank were established. We have seen the kind of wealth creation that they were able to create in just six years.
However, RBI seems to have a concern on how to improve quality to existing banking services and make more and more part of India banked. Well, this time RBI is all set to hit hammer on the nail.
Yesterday, it was announced by the finance ministry that it will be setting the stage for the Reserve Bank to roll out licenses after a gap of eight years. Post that, RBI is expected to make the norms public and invite applications for new private banks, a promise the Pranab Mukherjee had made in the previous budget.
Who will benefit?
– This reform will definitely augment competition in this industry dominated by antiquated and inefficient public sector banks.
– The business houses will be the major winners with Reliance Capital, Future Holding, AB Nuvo, LIC Housing and GIC Housing and broking houses not having exposure to real estate sector showing interest
– People are also likely to be winner as entry of new players will help in modernizing the sector what reforms has done for telecom sector
What could go wrong?
– If the licenses given to corporate are misused (making only their cost of funds lower), the whole intention for new banking licenses gets defeated.
– If the new bank’s network is not well penetrated into high cost rural areas, it will result underdeveloped banking infrastructure, illiteracy, mistrust & unfamiliarity with financial products.
The official said foreign direct investment (FDI) in new banks may be capped at 49 per cent for now, as the RBI was not in favor of higher FDI.
FDI will definitely help in taking the banking penetration faster. The success of UID project will also contribute to the financial inclusion.
It will also further extend the geographic coverage of banks and improve access to banking service. It will be critical when the application of licenses will begin and what will be the qualifying criteria.
One thing is sure; banking sector in India is set to sparkle over next few years.