Not all applicants to get bank licences: RBI governor

Reserve Bank governor Duvvuri Subbarao today said that all eligible entities that have applied for bank licences are unlikely to be granted licences.

The RBI had received a total of 26 applications for bank licences when the deadline for applications ended at 5:45 pm on Monday (1 July).

Speaking on the sidelines of the RBI's board meeting in Chennai, the RBI governor said the central bank was more concerned about the increasing non-performing assets of existing lenders than the number of banks.

He said Indian banks are well capitalised. He also said the RBI has no plan to pay interest on the mandatory cash reserves that lenders keep with the central bank.

Meanwhile , global rating agency Fitch also said the number of new bank licences to be granted would be limited against the tough requirements the RBI has prescribed.

Fitch also expects only a few to meet RBI's objective of addressing financial inclusion as the requirements place heavy demands on profitability and capital of new entrants.

Also, it would take longer than expected for new entrants to make their presence felt in the banking system, Fitch said in a statement.
RBI guidelines require new banks to open one in four branches in rural areas and fulfil statutory reserve requirements - including placing 4 per cent of deposits with the central bank and holding 23 per cent in government bonds from day one.

"We believe some entities will find the 40 per cent priority-sector lending targets tough, even though they have around three years to meet them. Infrastructure finance companies with large existing loan portfolios that have little or no prior presence in the required sectors are likely to find the target most challenging," it said.

According to Fitch, while the strict conditions mean limit to profitability for new banks, it may also not be a smooth ride for existing franchises, as most will have to start from scratch.

Successful applicants are likely to be those with financial firepower and strong management to handle the transition and growth, it said.

"We believe the established NBFI applicants may be better placed to switch to bank status. Nevertheless, the move away from their core competencies and well-managed operations into new businesses and unfamiliar risks with additional regulatory hurdles, may put pressure on their capital," it added.

Obviously, the RBI's preferences are different from those of finance minister P Chidambaram, who last week said there was no ceiling on the number of new banks that could be permitted.