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  • New bank licences: What it means

    It is not easy to run a bank in India. A bank raises deposit money from the public and lends it to borrowers at a higher interest rate. However, under existing Reserve Bank of India rules, a bank can lend only Rs 73 of the Rs 100 it takes as deposits. This means banks need to make enough money to pay for the cost of setting up a bank branch and hiring people and spending on technology.

    Yet, business houses in India consider ownership of a bank a prized trophy. The Reserve Bank of India is rolling out a new set of bank licences, and many corporate houses – big and small – have lined up with proposals to set up a bank.

Here are pointers that explain what this means to the sector:

  • Who is interested: The central bank announced on Monday that it has received 26 applications, some big names like Tata Sons and L&T, some non-banking financial services companies (NBFCs) like Shriram Capital and Reliance Capital, and some unrelated companies like India Post and UAE Exchange. In the fray are also some relatively lesser known entities like Suryamani Financing Company and INMACS Management Services Ltd.

  • What makes banking tough: Unlike many countries, permission for setting up banks isn’t given easily. For starters, minimum equity capital of Rs 500 crore is a must-have. RBI also requires that 25% branches opened be located in “unbanked” rural areas – typically those with a population less than 10,000. Although this rule is targeted to achieve financial inclusion, it means that deposit growth would be slow in a quarter of the branches. Banking is a lucrative industry. It gives access to cheap deposits. However, the lower cost will be offset by Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) requirements. This forces banks to set aside Rs 27 out of every Rs 100 it accepts as deposits. SLR is the mandatory investment of a portion of funds in government bonds, while CRR is the proportion of its deposits that a bank is supposed to park with the RBI. The current CRR is 4% and SLR is 23%.

  • What is expected:  Over the past one year, L&T Finance Holding shares have jumped 74%. Shriram Transport Finance shares have gained 27%. The S&P BSE Bankex gained only 8%. Shares of Reliance Capital shed 3.5%. All these companies have applied for a bank licence. These are non-banking finance companies that accept fixed deposits and lend to borrowers like a bank. However, they are not allowed to offer retail banking services. The logical step next is to become a bank. Share prices of these companies have moved in tandem with an expectation of being awarded the banking licence, according to analysts.

  • Banking on a licence

    • Bank licences: If some of these guys can run a bank, so can I.Read more

    • Why didn't more firms seek bank licences?Read more

  • 40%

    Only 59% of households in India had access to banking services in 2011, according to the most recent census data. This means around 41% of India, one of the fastest growing economies in the world, is “un-banked” despite the presence of a modern, sophisticated and well-equipped banking system. India currently has over 20 private-sector banks, 26 public-sector banks, apart from several co-operative and foreign banks. This leaves a large scope for new banks to increase the reach, penetration and geographic coverage of banking services as hoped by the government’s financial inclusion programme.