New banking licenses: RBI hits pause button!

The Reserve Bank of India (RBI) has gone back on its policy of issuing on-tap banking licenses. Sources aware of the matter have confirmed to Zee Business that the central bank is of the view that for the next 2-3 years no new banking licenses should be issued. As per sources, “RBI’s Board of Financial Supervision has taken ‘In Principle’ decision to not issue any new bank license for now”. RBI wants all the new players who have got licenses over the last 3-4 years to stabilize and see how they are progressing. If their progress is satisfactory and these banks do well, then RBI may re-think its decision. However, it was also revealed that the RBI will not communicate this view officially to new license applicants. 

The thinking within the regulator is that banks that got universal licenses in the past did not do well on their own. IDFC Bank had to go for a merger with Capital First to consolidate its position, similarly Bandhan Bank acquired Gruh Finance to scale up its operations. Most of the small and payments banks are struggling to make their presence felt. Similarly many old private banks could not do well so they are exploring mergers with big NBFCs or waiting to be acquired by some big banks. In fact even in PSU bank space consolidation is on the cards.  

In 2015, then RBI governor Raghuram Rajan had come up with On-Tap Policy for banking licenses.  Under this policy, a permanent window was opened for applicants to apply and thereafter RBI decided whether the entity was suitable to be issued a license. As per RBIs Report on Trend and Progress of Banking in India 2017-18 released in Dec 2018, 9 out of 10 Small Finance Banks were earlier NBFCs and so, due to NPA legacy issues, they had to make high provisions, resulting in losses. 7 payment banks are operating and the total consolidated balance sheet of payment banks showed net losses during 2016-17 and 2017-18. Even operating profit of these banks remained negative.

Under that 2 universal banking, 11 payments banks and 10 small finance bank licenses were issued in the year 2015. The idea behind Small Finance Banks was to help in financial inclusion to un-served and deserved sections of the society, mainly to small business and low income households. Similarly the payment banks licenses were issued to help low income and migrant workers for remittance purposes.    

Having said that, RBI will not be issuing new bank licenses, but old private banks who are exploring mergers with NBFCs will be free to apply for approval. RBI will decide  on such requests on a case to case basis. For example, UAE Exchange had applied in June, 2017 for banking license but it is still pending with the regulator.