Differentiated banking will make its debut in India with microfinance player Bandhan Financial Services (BFS) winning an in-principle approval to set up a bank. Infrastructure lender IDFC is the other aspirant to have made the cut, the Reserve Bank of India (RBI) said in a release on Wednesday. The central bank will hold consultations with the government on awarding a banking licence to India Post.
By selecting just two candidates this time around, the central bank would surely have left 23 others disappointed. They could, however, take heart from the fact that RBI governor Raghuram Rajan believes licences should be given more regularly or ‘on tap’ and can try their luck again.
While the need to further financial inclusion — a priority for the central bank — makes an MFI like Bandhan an obvious choice, IDFC’s skills as a specialised lender to the infrastructure space would have tilted the scales in its favour at a time when banks are struggling to recover loans to the sector. As Shikha Sharma, managing director & chief executive officer, Axis Bank, pointed out, “Infrastructure is critical for the country and we need strong and stable institutions to make the build-out happen.” Sharma welcomed the new entrants, saying, “It’s always good to have good competition.”
IDFC, for its part, doesn’t intend to limit its focus infrastructure. Rajiv Lall, chairman, confirmed to FE that IDFC was looking to be a universal bank and to lend across verticals. “We will need to build a branch network but we will not be lending only to infrastructure, we intend to explore other segments as well,” Lall said, ruling out an acquisition.
With more than adequate capital of R2,100 crore and no legacy issues in terms of either outdated technology or too large an employee base, Lall believes building the bank brick by brick is the way to go about it.
RBI’s requirement of 25%.
Chandra Shekhar Ghosh, chairman and managing director, Bandhan, told FE the MFI was ready to roll out a bank in 18 months, adding it had a head start given that 45% of its 2,000 branches were already in unbanked areas vis-a-vis the
With a net worth of R1,100 crore, capital, Ghosh said, would not be an issue, adding the biggest challenging in transforming to a bank was the execution.
Bandhan depends heavily on bank funding, the reason for its high loan rates of around 23%. The reliance on banks, Ghosh pointed out, was preventing it from reaching out further. “Once we have access to deposits, we should be able to bring down our lending rate by at least 10%,” Ghosh said.
The RBI said in its release 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,” the central bank said, adding it 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 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.
RBI believes 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.
Shinjini Kumar, leader banking and capital markets, PwC India, said, “Directionally, there are enough indications that we are moving to an on-tap licensing regime. One of the challenges with the existing licensing regime is that regulatory opportunity determines market entry rather than business need and preparedness of applicants. One would hope that licensing of these two banks is just the start.”
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