New Bank Licence Policy

1.
Prologue
2. Banking sector in British India
3. Birth of RBI
4. Banking sector Post Independence
5. Narsimhan Committee I (1991)
6. Bank licences: 1 Round (1993)
7. Narsimhan Committee II (1998)
8. New Bank licences 2 round (2001)
New Bank licences 3 Round (2013-14)
1. Bandhan Micronance and IDFC
2. In principle approval
3. What is Dierential licenses?
4. New Private banks: Pro and Against arguments
9.
Bharatiya Mahila Bank (2013)
1. How is it a Mahila Bank?
2. Business plan of Mahila Bank?
3. Why Mahila Bank is mere publicity stunt?
10.
Prologue
Bandhan and IDFC got new licences, you already know that. its just two
line current aairs. but for SBI
/UPSC interviews, we need to some background information for questions
like:
After Sahara Scam and NSEL crisis, why should we risk giving bank
licences to private companies?
In fact why not simply nationalize the existing private sector banks so
they cannot do any scams!?
1.
We already have large banks such as SBI, ICICI, BoB- all of them having
pan-India presence, capable
of fullling the goal of nancial inclusion, then why is there a need to get
new private sector banks?
2.
To answer such Devils advocate type interview questions, we need to
go back in history:
[Economy] New Bank Licences: Bandhan,

IDFC,
Bharatiya Mahila Bank; Dierential Bank
licences, Bimal
Jalan Committee, Narsimhan Committee;
arguments
favor against, Bank nationalization, Historic
evolution of
Banking sector in India

st
nd
rd
New Bank licences: Ready revision note for IBPS & UPSC
http://mrunal.org/2014/04/economy-new-bank-licences-bandhan-idfc-bha...
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Banking sector in British India
There were two types of banks

British Banks Swadeshi Banks
First, East India company establishes
three Presidencies in India- Bombay,
Bengal and Madras
Three Presidency banks setup in those
cities. Later merged into one Imperial
bank (21)=> SBI (55)
Parallel to British banks, Indian banks also setupAllahabad Bank, Punjab national bank (PNB), Bank
of Baroda (BoB), Canara bank etc.
Their target audience = British army, civil
servants and judges
Target audience= big merchants, particularly
raw-material exporters in Bombay and Madras
Presidency.
Overall, neither British Banks nor Swadeshi banks helped in the nancial
inclusion of poor people, they
still had to rely on local money lenders and Zamindars.
Birth of RBI
By early 30s, there were >1200 banks in India!
But all of them under Companies law- there was no banking regulation, no
RBI, no SLR, CRR, repo
rate, reverse repo rate etc. So the Civil service & BankPO aspirants of that
era, were relatively
Stress free compared to present generation.
Problem starts with Great American depression (29) => sharemarket and
companies of US and
Europe collapse= raw material import declines = desi merchants cannot
repay loan EMIs = Indians
banks starts collapsing one by one.
therefore, British Indian government setups Reserve bank of India to
supervise over these banks
(34)
Banking sector Post Independence
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(https://www.ickr.com/photos/97816112@N02/13909976043)
CLICK TO ENLARGE
from mid-50 onwards, there is gradual expansion of banking sector in

India
SBI, ICICI, PNB, BoB all start opening more and more branches.
but still target audience= merchants, urban (upper) middle class and
industrial houses
Branches increased? YES
Rural penetration? NO
Did they help aid in Five year plans like giving cheap loans to farmers and
micro-enterprises? NO
All these banks were in the hands of industralists. (who owned majority
shareholding => can vote
majority of board of directors=> banks policy decision will only be made
to suit those industrialists
e.g. opening branches near factory-townships, giving loans @cheap rate
for setting up new
factories and so on.)
Nationalization
Government gets impatient with ^all this.
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starts nationalizing banks (By taking over the ownership from those
industrialists)
Year How many? who?
55 1 Imperial bank (SBI)
69 14 banks with >50 cr. deposits.
80 6 banks with >200 cr. deposits (Andra, Vijaya, Oriental bank of
commerce etc.)
Nationalization: more problems
In theory, nationalization =government becomes majority shareholding in
those banks =>
government can pick board of director of her choice = bank takes
decisions to suit governments
Five year plan requirements= everyones happy, right? nope
1.
2. In reality, nationalization =created more problem than it solved. for
example
Now all the board members = politicians, their relatives, retired IAS/IPS
etc. Result? Professionalism
=nope, sycophancy=yes.
3.
Banks were forced to give loans @throwaway prices to farmers/ small
enterprises, sometimes even
cost of giving loan (sta salary, light bill, oce rent etc.) would be higher
than the prot involved.
4.
Local politician interfered in operations. Run loan mela in our
Constituency, open all branches in
RaiBareily and Amethi only, pass applications of our chamcha-log. They
would get lakhs of rupees
@4% interest rate (to buy cattle) and then circulate the same money to
farmers @36% interest rate
and so on
5.
When banks tried to recover loan money from such political elements, t
heyd get stay order from
courts, then taarikh pe taarikh.
6.
This politicization even came into Bank employee unions- theyd always
demand higher wages and
lower working hours, irrespective of how much prot bank made.
7.
8. adding insult to injury, RBI kept the CRR and SLR very high (15 & 40%
respectively)
9. =very less money left for banks to lend.
Business man cannot get easy loans = no business expansion =export
declines =in a way all this
contributed to the Balance of Payment crisis (BoP) in 1991.
10.
moral of the story = nationalization is not a solution even if Sahara,
NSEL, Ramalinga Raju, Ketan
Parekh, Harshad Mehta or Mr.XYZ is doing scam- that doesnt mean you
should nationalize everything.
Narsimhan Committee I (1991)
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By government of India in 1991. It recommended following:

recommendation result?
Government / RBI mustnot
regulate the banks loan interest
rates. Banks should be allowed to
decide their home loan, bike loan
etc rates by themselves.
RBI adopts BENCHMARK PRIME LENDING RATE (BPLR) =>
nowadays Base rate system.
setup Debt recovery tribunals. so
loan defaulters cannot get stay
orders from courts, no more
Taarikh pe taarikh
DRT setup in 1993 => later SARFAESI Act in 2002
(http://mrunal.org/2012/12/economy-sarfaesi-assetreconstructioncompany-arc-security-receipt-sr-qib-drt.html)
to give them more powers.
Liberate Branch expansion policy.
Let the banks open branches
outside Raibarely and Amethi also.
done. banks can open branches anywhere. only condition 25%
of the new branches each year must be setup in rural areas.
For more read Nachiket Committee article. (http://mrunal.org

/2014/01/banking-nachiket-panel-universal-electronicbankingaccount-ueba-payment-access-points-nancialinclusionseigniorage-and-more.html#614)
Reduce CRR and SLR so banks are
left with more money to lend.
Done, gradually reduced. from (15,40)=>(4,23)
NBFC regulatory framework done
government should reduce its
shareholding from public sector
banks.
done, SBI shares sold, nowadays government owns ~60%.
(this facilitates entry of professionals in the board of directors)
Allow entry of private sector banks
and foreign banks.
done, leads to rst round of bank licences, explained below:
Bank licences: 1 Round (1993)
RBI invites application 1993

New private banks start Operation: 1994-95 onwards
Total ten private banks given licences: 6 still running + 4 closed down.
6 running
1. ICICI
2. HDFC
st
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3. UTI=>became Axis bank (2007)

4. IDBI
5. Indus
6. DCB
All of above running successfully, so that gives us positive argumentsthat not all private entities are
seamstress. in fact, ICICI, HDFC, Axis = top banks of India, even have
presences abroad, employ lakhs
of people. Hence no harm in giving bank licences to private players.
4 closed down
Bank merged with why?
Global
Trust Bank
Oriental bank
of Commerce
recall Ketan Parekh- he took money from Madhupura cooperative
Bank, Abad and used it to run scam in Sharemarket. Same Ketan
had also taken some money from Global Trust bank also=> news
stories =>junta panics and runs to take out all money=> business
collapsed.
Bank of
Punjab
Centurion
bank
loss making. hardly any depositors and loan takers, couldnt stand in
competition against SBI, ICICI, BoB etc.
Centurion
bank
HDFC same as above
Times Bank HDFC same as above
These four #EPICFAIL banks give us the negative arguments that private
companies must not be
given bank licences. Because they can also close down like ^these,
creating panic among the clients,
blood pressure, heart attacks and suicides.
Anyways, moving on
Narsimhan Committee II (1998)
1. Introduce Voluntary retirement scheme (VRS) in public sector banks.
2. Legal reforms for loan recovery. =>SARFAESI 2002
3. Computerization, electronic fund transfer, legal framework
4. Payment and Settlement Act=>Retail (ECS, NEFT, Card) + Wholesale
(RTGS)
5. Continue allowing entry of private banks and foreign banks.
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New Bank licences 2 round (2001)

2001: applications invited
2003-04: winners launch banks.
From the earlier #EPICFAIL of those four banks, RBI also learned lesson.
This time RBI gave licence only two strongest contenders:
1. Kotak Mahindra
2. Yes Bank
New Bank licences 3 Round (2013-14)
2010: Finance minister says we need to give more licences.

2013, February: RBI invites applications with following conditions:
Conditions/guidelines for new bank licence application:
must include class 10-12-college marksheet, school leaving certicate and
three passport sized
photos
1.
2. 10 years successful work-ex (=Fit and proper criteria)
3. minimum capital Rs.5 billion
Will have to get shares listed on stock exchange within three years, bring
down voting rights to 15%
within 12 years. why?
4.
say Anil Ambani gets licence, in the beginning hed have ~100%
ownership and decision making.
But in the long run such one man game show = not good in banking
sector. So hell have to get
the shares listed within three years.

once shares are listed, junta starts buying those shares= they elect the
board of directors (BoD) and
then BoD makes policy decisions of the bank, appoints CEO and top
executives and so on.
By 15 years, Anil should sell majority of his shares to junta- so that he
holds barely ~40% or less of
the bank shares = he cannot have lot of say in banks decision making
= bank doesnt run
according to his whims and fancies =rational decision making.
Anyways moving on to the rules
5. foreign shareholding must not be more than 49% (for the rst ve
years)
nd
rd
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50% of 6. the directors should be independent (=not chosen by majority

shareholder e.g. Anil)
Such bank must not invest in shares/bonds of its parent group (e.g. Anils
telecom/electricity
business)
7.
8. must have viable business plan
must open atleast 25% branches in the unbanked rural areas. (as per
latest census there are
~10000 such places)
9.
10. Have to comply with PSL (priority sector lending) norms.
Many other technical rules but for descriptive/interview answer- above 9points sucient.
Total 26 applied, including Anil Ambani, Birla, Bajaj, Tata, Muthoot, Indian
post.
later two left (TATA, Videocon)
+ one came (KC Land and nance ltd.)
Thus 25 left.
Bimal Jalan Committee
Now Rajan had to decide winners among those 25 applicants.
Sep 2013: Rajan sets up RBI High level advisory Committee to process
those applications.
Bimal Jalan (Chairman) Former RBI governor
Usha Thorat Ex-RBI Deputy Governor
C B Bhave Ex-Sebi chairman
Nachiket Mor RBI board member
Important: Bharatiya Mahila Bank also launched in Sep13 (but its public
sector bank, has nothing to
do with this third round of Bank licences or Bimal Jalan Committee)
Anyways, moving on
November 2013 Bimal rst meeting

February 2014 Bimal submits report
March 2014 Rajan fears Election commissions model code of conduct,
seeks their approval.
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31 March EC gives approval

2 April Two winners announced. (Bandhan Micronance and IDFC)
Bandhan Microfinance and IDFC
Bandhan Micronance
IDFC (Infrastructure Development and Financial
Corporation)
West Bengal Mumbai
Micro-nance company infrastructure nance company
Chandra Shekhar Ghosh Rajiv Lall
net worth 1100 Cr., 45% branches in rural
areas
net worth 21000 cr., but rural presence low.
These two are given only in-principle approval. Meaning
In principle approval
Within 18 months
must get net worth Rs.1000 crore
Must open 25% branches in unbanked rural areas.
once they fulll above conditions, RBI will give them licence under
Banking Regulation Act, 1949
[Sec.22(1)]
Once they get licence under BRA, then we can open current account,
savings account etc.
RBI has also prohibited the promoters (Ghosh and Lall) to hold CEO
position in their respective banks.
This is meant to prevent conict of interest. Because in past, Global Trust
banks CEO Ramesh Gelli was
accused of involved in Ketan Parekh scam.
Curiously though Yes Banks promoter Rana Kapoor enjoys both MD and
CEO position in his bank!
India post
For Indian postal department, Bimal Jalan said RBI should consult
separately with government and
give licence if necessary.
Kumar Mangalam Birlas name involved in Coal block scam, Anil Ambani in
2G case, hence licence
st
st
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not given.
What is Differential licences?
Total 25 applied, but only two won so what about the remaining 23
contenders? Will they get any
consolation prize? Yes.
Rajan said they can later apply for Dierential bank licences.
Dierential bank licences = for opening payment banks, wholesale banks
etc (whore not full
banks like SBI, PNB etc.)
for more on these dierential banks read following articles on Nachiket
Committee:
Wholesale Banks (http://mrunal.org/2014/01/banking-shadow-bankswholesale-bankssecuritizationfunctions-features-nachiket-committees-recommendations.html#287)
1.
Payment Banks (http://mrunal.org/2014/01/banking-nachiket-committeepayment-banks-rationalefeaturesadvantages-limitations-pre-paid-instrument-providers-ppi-ussdbanking.html#68)
2.
New Private banks: Pro and Against arguments

Anti arguments Pro arguments
There is no need for additional private
banks, existing banks sucient.
Existing banks not sucient for 100% nancial
inclusion.
only one in two Indians have bank account
Only one in seven Indians gets loan from banks
(others have to rely on the evil money lenders who
charge 36% compound interest rate!)
As per Census 2011
Only 67% of Urban households getting banking
services.
Only 54% Rural households getting banking
services.
10 of 14 2/16/2015 4:58 PM
well in that case, government should

launch some Rajiv Gandhi scheme to
open bank accounts for everyone, there
is no need to get new private banks!
Besides, these two (Bandhan and IDFC)
are too small to be any relevant in
nancial inclusion.
Throwing sakaari money, subsidies and schemes to
solve every problem = bad idea. Business has to
become vibrant by itself.
It is true both Bandhan and IDFC are mosquitos
compared to elephants like SBI and ICICI but every
maestro was an amateur someday.
As per your own table, Bandhan already

has 45% of her branches in rural area as
micronance company, then why do they
need bank licence? Theyre already doing
nancial inclusion!
as a Micronance company, Bandhan cannot open
savings account / current account etc (Because they
dont have bank licence)
as a result, such micronance companies have to
borrow money from other banks, NABARD etc
@12-15% interest + have to maintain prot
margin=> they give loans to poor people yes, but at
23-25% interest rate.
but if same Micronance company was given bank
licencee, they can accept publics deposit money
under savings account ~4% interest, xed deposit
~9% interest => cheaper way to arrange loan
money. can give loans to poors at reasonable rate
like 10-15%
In the rst round, ten banks were given
licence, four of them closed
down..private sector cannot compete
with existing giants. They try to take
shortcuts, hence all the scams.
The same licensing round gave us giants like ICICI, Axis
bank and HDFC. It is wrong to think every private player
is out there only to bully, loot and steal.
The same ICICI Bank, HDFC Bank and Axis
Bank were caught violating KYC norms
and doing money laundering case in the
Cobra post sting operation.
RBI has taken quick and rm action against those three
banks. And the inquiry revealed it wasnt the mass scale
organized money laundering operation but irregularity
on part of certain branch managers to overcome the
targets.
These two small players cannot even
aord to launch all India ATM network,
forget about opening branch oces.
They dont need to open ATMs anyways, because of the
White label ATM scheme.
11 of 14 2/16/2015 4:58 PM
RBI should gave given licences to more

applicants, like they did in the 90s (ten
licences).
In the early 90s, all nationalized banks were heading
towards #EPICFAIL, so to correct the course, RBI had to
get in more players to breed competition. Same is not

the case today- two new banks are good enough. If
Rajan gave licence to 15-20 applicants at once => too
much competition => predatory pricing like in aviation
industry => smaller players will be wiped out.
Public sector banks are already bleeding
because of the heavy marketing and
teaser rates oered by Private banks.
Two more such banks will increase the
misery of the public sector banks.
In the end, Business is all about the survival of the
ttest. Public sector banks and their trade unions
should learn to perform or perish. Customer deserves
better services. Just to make life easier for sarkaari
banks, we must not prevent the entry of private sector.
Rajans American ideas of free market,
wholesale banks, dierential licenses etc.
will ruin Indian banking sector and
Economy. What works in USA need not
automatically work in India as well. This
will lead to subprime crisis like disaster.
Just two new banks cannot create Subprime crisis. RBI
is much more vigilant and strict than their American
counter part US feds. It is wrong to assume that Rajan
comes from America so he is automatically an evil
capitalist, and all the hushiyaari (smartness) is with
Newspaper columnists in The***** only.
More pro-con arguments can be added, post them in comments below!
Bharatiya Mahila Bank (2013)
This has nothing to do with Bimal Jalan Committee or third round of

private bank licences. But to
confuse you in MCQs, the examiner will deliberately include some facts
related to Mahila bank.
Therefore, you must know the basics:
Budget 2013: Chindu announced to open this bank with 1000 crore Rs.
(=100% State Owned /
public sector bank.)
Keep in mind, Chindu also setup Nirbhaya fund for women security
initiatives. But thats separate
1000 crore fund and this is separate 1000 crore bank. (tricky MCQ)
Concept is not new: Pakistan and Tanzania already setup such banks in
past.
MBN Rao Panel prepared blue print (he was chief of Canara bank)
Sept. 2013: licence given
November 2013: bank launched on Indira Gandhis bday.
HQ= Delhi but since assembly election was going on, hence to follow the
model code of conduct,
they launched the bank from Mumbai
12 of 14 2/16/2015 4:58 PM
How is it a Mahila Bank?

Boss Usha Anantha-Subramanian =woman
Board of Directors=all women.
but sta = male + female
mid-level sta from BoB, PNB on deputation= male + female.
Customers (Depositors) = male + female. (no distinction among them,
both get same interest rate
on their savings account / FD etc.)
BUT Loan giving => predominantly to women.
Women entrepreneurs can get loans up to Rs 1 crore without collateral
(meaning they dont have
to mortgage their house/factory/jewellary)
kitchen loans, education loans, small home-based catering businesses
Projects for Skill development, nancial literacy among women.
hence the name Mahila Bank- because itll predominantly cater the
credit needs of women
entrepreneurs and Self help groups.
Business plan of Mahila Bank?
1. By March 2014: 25 branches in capitals/major cities of India
2. 25% branches in unbanked rural areas.
3. By 2020: 700+ branches; 60k cr business
Software
as such most desi banks use nacle core-banking software designed by
Infosys
But this Mahila bank got Core Banking Software by FIS (American Co.)
(^ya this type of GK essential for IT-graduates for the bank interview
stage.)
Why Mahila Bank is mere publicity stunt?
(Interview Q.) Bharatiya Mahila Bank is a mere symbolic exercise for feel
good publicity. Do you
agree? Yes/No and Why?
I already mentioned the Positive points 1 cr. loan without collateral, skill
development for women etc.
But in Group discussion/ interview, you need to be aware of the negative
points as well, in case the
other party decides to play Devils advocate.
13 of 14 2/16/2015 4:58 PM
Mahila Bank is mere tokenism, without substance because:

SBI, PNB, BoB better suited, they have pan-India presence including in
rural areas. Govt. already
majority shareholder. Could have launched the 1 crore without collateral
scheme without Mahila
Bank.
1.
2. 25% rural branching: duplication of eort.
In the rst phase focus on state capitals and UT = real need of women
nancial inclusion is in rural
areas and not those big cities.
3.
Mid-level executives all imported from BoB, PNB etc. such deputed sta
usually dont have or
motivation to put their blood and sweat in making this new bank
successful. Their loyalty remains
with their own parent bank only.
4.
Theyre oering 4.5%/5% interest rate on savings account but pan India
presence necessary,
otherwise customers wont feel attracted. Besides private banks like Kotak
already oering 6%
5.
14 of 14 2/16/2015 4:58 PM

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1.

[Economy] New Bank Licences: Bandhan,

Banking sector in India

Banking sector in British India

There were two types of banks

Banking sector Post Independence

from mid-50 onwards, there is gradual expansion of banking sector in

Narsimhan Committee I (1991)

By government of India in 1991. It recommended following:

For more read Nachiket Committee article. (http://mrunal.org

Bank licences: 1 Round (1993)

RBI invites application 1993

3. UTI=>became Axis bank (2007)

New Bank licences 2 round (2001)

New Bank licences 3 Round (2013-14)

2010: Finance minister says we need to give more licences.

the shares listed within three years.

50% of 6. the directors should be independent (=not chosen by majority

November 2013 Bimal rst meeting

31 March EC gives approval

New Private banks: Pro and Against arguments

well in that case, government should

As per your own table, Bandhan already

RBI should gave given licences to more

get in more players to breed competition. Same is not

Bharatiya Mahila Bank (2013)

This has nothing to do with Bimal Jalan Committee or third round of

How is it a Mahila Bank?

Mahila Bank is mere tokenism, without substance because:

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