Will new bank licenses ever be given?

Thu, 29 Dec Pre-Open

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In this year's budget address, Finance Minister, Mr Pranab Mukerjee, spoke about awarding banking licenses to certain entities. But, this was not the first time that talks on new bank licenses were under way. New banks were supposed to enter the system in 2004 and in 2009, yet they never appeared. 2011 is now almost at a close and still there are no new licenses being awarded.

The Reserve Bank Of India (RBI) put in place draft guidelines on the entry of new banks into the system. A number of non-banking finance companies (NBFCs) as well as industrial houses were initially interested. But, with the banking environment deteriorating and the economy slowing, we believe that some corporates may actually be happy that these new banks were a non starter this year. They at least did not have to lock in billions of rupees in scarce capital. Interest rates have reached their peaks, and companies are not willing to borrow, forget part with their already scarce resources.

Plus, the government has been finding it extremely difficult to pass any issue at hand. Foreign direct investment (FDI) in retail was announced with great pomp and splendor. But before you could say 'Walmart', the proposal was shelved. After an epic battle, the Lokpal Bill was recently passed in the Lok Sabha. The Rajya Sabha now needs to give it a seal of approval. Either way, policy inaction has been characteristic of the government, and a number of other issues are still waiting to move forward in the assembly. If and when the proposal for new bank licenses passes the parliamentary vote, it remains to be seen which parties will still be interested in the same.

The criteria for the entry of new banks are quite stringent. Thus only really serious players will muse entry. Plus, these new banks cannot only cater to the cream of the society in metros. They actually will have to get their hands dirty by opening up a number of branches in rural areas. After all, financial inclusion is a big priority for the government. Also, banks have very strict reporting guidelines, and need to follow other stringent regulatory criteria as per the RBI. As of now, no one seems to be missing the fact that there are no new banks in the system. However, once the banking environment improves we can expect a huge clamoring for these new banking licenses. Will 2012 be the year of new banks? Only time will tell.