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New Bank Licences - Background and Impact
by
P E Mathai,
[An ex banker having 35 years of experience in Banking. He retired as the General manager Development and planning from South Indian Bank in the year 2010]
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Relevance of New Banks
The Government of India is currently under the process of issuing few licenses to start banking business in India. As the government and its agency, the Reserve Bank of India is advocating the concept of larger banks in place of smaller and weaker Indian banks to counter the challenges paused by international banks , This present move by the govt sounds paradoxical. The government has its own compulsions and reasons behind the present move.
Bank Nationalization
In 1955 imperial Bank was nationalized to form State Bank of India. In 1960 seven state banks were nationalized and were converted to subsidiaries of SBI. In 1969 the ruling congress govt under the leadership of Indira Gandhi nationalized 14 prominent Indian banks having deposits of more than ` 50 Cr. The objective behind this exercise was to extend banking assistance to the masses. Again in 1980, six more banks were nationalized with deposits of more than ` 200 Cr bringing 90 % of banking activities under public sector domain. Nationalization brought in a lot of changes in the banking industry. The management of the major financial institutions, by the boards decided by the government brought welcome changes to the Indian economy. The Indian Banks started extending their services to the rural population of India.
The bank nationalization brought along a number of problems as well. Many banks lost its’ professionalism due to political interference. The political parties started utilizing banking machinery for their political gains. Irregular loan accounts piled up in banks affecting bottom line of most of the public sector banks. The militant trade unionism in banks added salt to the already bleeding Banks as a result; the banks became white elephants within a few years of its’ Nationalization.
Move by the Government to denationalize the banks
Government of India was forced to infuse capital to many of the public sector banks for keeping them operational. By the end of eighties, the government had decided to find a permanent solution for this stalemate in the public sector banks. They mooted the idea of de nationalization for some of the non performing public sector banks which invited strong resistance from trade unions in banks and finally the idea was dropped by the government.
Formation of new generation banks
In the early nineties the government came out with the idea of licensing few banks in private sector which were to work in a fully computerized atmosphere with all modern amenities. Preference were given to banks supported by financial institutions, leading to existence of new generation of banks, out of which some of them disappeared after few years after their inception. Banks including ICICI bank, HDFC Bank, Axis Bank, IDBI Bank Indus Ind Bank and the late entrants Yes bank and Kotak Mahendra Bank were made to work in a different platform from that of the old generation banks. The new generation banks have re written their model of functioning of banks in India and created a revolution in the banking sector. The approach of new generation bank was a great relief to the customers who dealt with them. User friendly and prompt service, late hour banking, introduction of core banking solutions and ATM service etc were some of additional services extended by these new generation banks. While the public sector banks are limping for progress the new generation banks has grown by many folds in the last two decades with the change in approach from them and it forced the old generation banks to fall in line . However this exercise failed to support majority of Indians who were below the poverty line and settled in rural villages.
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Proposal for Merger & Acquisition
Even though the banking system in India is regulated by the Reserve Bank of India the size of our banks were not in comparable size with the international banks and it has been a concern for the regulators ever since the liberalization of our economy. This was a persistent concern for the government, as being the largest owner of Indian Banking system. The government proposed merger and acquisition route for strengthening the banking system in India which led to the idea of merger of subsidiaries of State Bank with the principal. Some more subsidiaries are yet to be merged with SBI.Another proposal was to merge some of the unviable public sector banks to form few strong banks. This proposal is still under the scrutiny of the government. The idea of the government is to reduce the number of banks and increase the strength of each entity.
The latest move by the Government.
Two major disturbing realities of Indian Banking Industries are -:
· Our banks are not in comparable size with the international banks .Hence the competitiveness of the Indian Banks to support the growing Indian economy is at stake as compared to its’ International counterpart.
To extend competitive service to the growing economy, our banking system should have a level playing strength with their international counterparts. This may be one of the reasons for the Government to encourage banks for merger and acquisition. In the near future this may become a reality. A number of banks in the public and private sector will merge to become banks with international standards. Now all the payments from government to its citizens including, subsidiaries, grants , concessions and other payments from government are indented to be paid through banks to avoid any misuse of machinery by middlemen. Thus it become mandatory for every citizen including those belonging to the BPL category to have bank accounts with any one of the banks in India. The present banking system has failed to penetrate in to the rural population. Consequently it has become necessary to give license to more banks to achieve this goal. The recent move by the government to give licenses to more banks will resolve this problem to a large extend.
Front runners for banking license.
The Reserve Bank of India received applications from 26 aspirants from different fields for banking license. It include NBFCs, Corporates, Microfinance Institutions, Government Agency namely Post Office and Infrastructure Financing NBFCs. Experts predicted that the government may issue 3 to 4 licenses but FM gave indication that the number may go up further.
The department of Post is desperate to enter in to banking business. In the case of reach and reliability they are in the number one position. The department has put up their note to the government requesting to support them with ` 1.9k Cr. to start a Bank. State Bank Of India the largest bank in India and its subsidiaries together have more than 25000 branches which is owned by the government. We have a number of public sector banks in addition to State Bank of India. The performance of Post office or BSNL a public limited company floated by curving out the business from Postal Department is not encouraging. Post office and BSNL is making huge losses to the government. Issuing banking license to post office will be suicidal instead they may be advised to concentrate in their own business of communications in which they have proficiency including courier service and the state bank of India and the public sector banks may be strengthened.
In the case of infrastructure financing NBFCs, the retail segment where the banks need to concentrate will be a new area and they have to start from scratch. To overcome the initial teething problem they will have to work over time. The presence of Micro Finance Institutions are limited to certain pockets with minimal own fund. The government may not get the expected results by issuing license to such Institutions. The nationalization was carried out earlier to liberate the banks from the clutches of the corporate houses who were having other interests . Hence the government may think twice before issuing license to Indian Corporates. The broking companies are also not a better option for issuing banking license.
Non Banking Finance Companies in the recent past in India has given tough competition to Banks. The study conducted by the committee constituted by RBI and headed by Mr.KUB Rao was an eye opener for the government. The services rendered by some of the NBFCs were applauded by the Rao Committee. Financial inclusion includes satisfying all the financial requirement of the citizens and it will not end with merely opening a savings bank account. The revelation that the NBFCs are doing much better than some of the conventional banks for supporting the rural population by reaching out to them was one of the findings of Rao Committee. The penetration of the NBFCs in the areas where the banks were hesitating to enter is one of the success stories of the NBFCs. The growing popularity of NBFCs and its growth prompted the regulators to give preferential treatment to Banks and they came out with stringent control measures for NBFCs to protect the interest of the banks. Insufficient control measures over the NBFCs were always a concern of the regulators. In the present scenario government will always be happy to convert as many NBFCs as possible to banks provided the promoters have an unblemished track record with good financial backing and further they will not indulge in any financial activities outside the banking activities. The NBFCs with maximum reach will have better prospects in getting the license.
The banking Industry after the formation of new Banks.
The growth of banks after Nationalization was rapid. The young generation preferred banking jobs, post nationalization as they were better paid. The banks experienced exodus of staff that joined the banks in mid seventies and after, during the past five years. By 2015, majority of the bank employees who joined banks during the peak time after nationalization will retire creating a vacuum in the banking Industry. Since, now the new generation prefer IT to banking sector due to the attraction in the initial salary the new banks will face problem to get better hands at the present salary. The attrition rate in the existing banks also will increase due to the pull and pressure from the new banks.
Last year public sector banks recruited 65k staff. This year it may reach more than a lakh with the addition of new banks. The non availability of experienced staff will be a big head ache for the new comers. The banking field will became more competitive. Banks will be forced to come out with innovative ideas suiting the requirements of the general public. Non branch banking will be one of the expected innovations in this field. On line services and door step services will be the order of the day.
The existing banks will join together to form healthy big banks. Some of our banks will become international players. The customers will get value added services and it will reach to every nook and corner of the country. The country can expect competent and customer friendly banks shortly. Let us wait for banking with a difference and the expected changes that it may bring to our economy.
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