New Bank Licenses

Why restriction on New Banks has been bad?

  • Monopoly of Some banks:
    • Public sector banks still have 70% of the market share leading to very less competition and accountability. Also one of the core objectives of the banking system is the financial inclusion has been neglected because of this.
  • Not many banks were formed since independence .This led to limited options for the customers and depositors. The entry of corporates into banking system has been looked from suspicion mostly which is reiterated by the tedious process they need to fulfill to form the bank. Till 2014, in 67 years since India’s Independence, we had got 13 new banks in three phases and all have not survived.
  • The attitude of the banks to lend loans for the high profile people irrespective of their paying back capacity led to loss of trust in the banking system. This has also led to increase in non-performing assets.
  • No substantial loaning for the most needed sectors like infrastructure because of the conservative system of giving loans.
How this is changing in recent times?
  • The scene has changed dramatically when it allowed white label ATM’s in India. Along with that in 2015 Bandhan Bank Ltd was launched, the first instance of a microfinance institution (MFI) converting itself into a bank. IDFC Bank Ltd followed later.
  • RBI gave conditional licences to 10 small finance and 11 payments banks
  • RBI expressed its intention to allow wholesale banks and custodian banks to come up
  • It released draft guidelines for ‘on-tap’ licensing of private sector universal banks which will have the following impact:
    • ‘On-tap’ licensing will ensure that every ‘fit and proper’ candidate is allowed to float a bank.
    • As competition intensifies, the informal cartelization of banks to deny benefits of free savings rate will break and loan rates too will come down.
    • India’s government-owned banks, which account for about 70% of assets, will lose their market share.
  • Finally, it is now clear that India is moving into a bank-led financial system. Eight of the 10 licences for small finance banks were given to MFIs. Barring a couple, all large MFIs will transform into banks.
    • Relatively small MFIs and NBFCs will continue in different niches but, overall, the banks will dominate the financial system and the regulatory arbitrage between banks and non-banks will end



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