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India announces first bank licences in a decade

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(Globalpost/GlobalPost)

India on Wednesday announced it was issuing two new bank licences for the first time in a decade as it accelerates a push to bring more Indians into the formal banking system.

The Reserve Bank of India (RBI) announced "in-principle" approval for Mumbai-based IDFC, a major infrastructure project lender, and microfinance company Bandhan Financial Services, located in eastern India, to establish banks.

Just 35 percent of Indian adults have bank accounts, a figure which the RBI calls "miniscule" and says shows a "crying need for a further push to the financial inclusion agenda" to include India's poorest.

Under their licences, the new banks must open 25 percent of their branches in rural areas that have no banking services.

The two companies were chosen from among 25 applicants, including corporate heavyweights such as the telecom-to-energy ADAG Group, controlled by billionaire Anil Ambani.

The central bank said IDFC and Bandhan were chosen on the basis of their 10-year business track records and their proposed business models for the banks.

Indians are slated to start voting next Monday in elections in which the conservative Hindu nationalist opposition Bharatiya Janata Party is expected oust the left-leaning Congress party.

The RBI said the decision to grant the licences was taken after consulting the Election Commission to ensure that the move would not contravene the electoral conduct code.

The RBI added given public worries about widespread corruption, its approach in awarding the licences had been "conservative" and it gave the licences to bodies "intimately trusted" by the public.

The central bank said it plans to revise bank licensing rules and award licences "more regularly" in the future.

It held out hope to failed applicants, saying "some of these who did not qualify in this round for a full-fledged banking licence could well apply in future rounds".

India's banking sector is dominated by public sector banks and heavily regulated.

After India began its process of liberalising its inward-looking economy in the early 1990s, the central bank awarded 10 commercial licences in 1994 and another two in 2004.

The government declared four years ago a need to extend access to banking services and said there was a need to bring in more private players.

RBI governor Raghuram Rajan, a reform-minded economist who took over the central bank last September, set up a four-member panel to vet the applications.

Advocates hope getting new players in the banking sector will bring in fresh capital and technology and energise the banking system which has been afflicted by a growing number of non-performing loans.

Bandhan is the first Indian microfinance firm to get a bank licence. Microfinance companies lend to the "poorest of the poor" who are unable to get funds from mainstream banks.

"We will (now) be able to offer full-fledged banking services to the poor people," Bandhan chairman Chandra Shekhar Ghosh said.

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http://www.globalpost.com/dispatch/news/afp/140402/india-announces-first-bank-licences-decade