New Bank Licences - Ready Revision Note For IBPS & UPSC

7/29/2014 New Bank licences: Ready revision note for IBPS & UPSC
[Economy] New Bank Licences: Bandhan, IDFC, Bharatiya Mahila Bank; Differential Bank
licences, Bimal Jalan Committee, Narsimhan Committee; arguments favor against, Bank
nationalization, Historic evolution of Banking sector in India
1. Prologue CSAT क ल क सु
बह
2. Banking sector in British India
3. Birth of RBI 26 23 11 178
4. Banking sector Post Independence days hrs mins sec.
5. Narsimhan Committee I (1991)

What's New ?नया या?
st
6. Bank licences: 1 Round (1993)
7. Narsimhan Committee II (1998)
8. New Bank licences 2nd round (2001)

9. New Bank licences 3rd Round (2013-14)
1. Bandhan Microfinance and IDFC
2. In principle approval
3. What is Differential licenses?
4. New Private banks: Pro and Against arguments
10. Bharatiya Mahila Bank (2013)
1. How is it a Mahila Bank?
2. Business plan of Mahila Bank?
3. Why Mahila Bank is mere publicity stunt?
Prologue
important: SSC has uploaded halltickets for reexamintion of CGL-2013 to be held on 27th April.
Respective players check your regional SSC sites accordingly. now coming to the subject…
Bandhan and IDFC got new licences, you already know that. it’s just two line current affairs. but for
SBI /UPSC interviews, we need to some background information for questions like:
1. After Sahara Scam and NSEL crisis, why should we risk giving bank licences to private
companies? In fact why not simply nationalize the existing private sector banks so they cannot
do any scams!?
2. We already have large banks such as SBI, ICICI, BoB- all of them having pan-India presence,
capable of fulfilling the goal of financial inclusion, then why is there a need to get new private
sector banks?
To answer such “Devil’s advocate” type interview questions, we need to go back in history:
Banking sector in British India
http://mrunal.org/2014/04/economy-new-bank-licences-bandhan-idfc-bharatiya-mahila-bank-differential-bank-licences-bimal-jalan-committee-narsimhan-co… 1/14
There were two types of banks
British Banks “Swadeshi” Banks
First, East India

company establishes
three Presidencies in
Parallel to British banks, Indian
India- Bombay,
banks also setup- Allahabad
Bengal and Madras
Bank, Punjab national bank
Three Presidency
(PNB), Bank of Baroda (BoB),
banks setup in those
Canara bank etc.
cities. Later merged
into one Imperial bank
(’21)=> SBI (’55)
Their target audience = Target audience= big merchants,

British army, civil servants particularly raw-material exporters in
and judges Bombay and Madras Presidency.
Overall, neither British Banks nor Swadeshi banks helped in the financial inclusion of poor people,
they still had to rely on local money lenders and Zamindars.
Birth of RBI
By early 30s, there were >1200 banks in India!

But all of them under Companies law- there was no banking regulation, no RBI, no SLR, CRR,
repo rate, reverse repo rate etc. So the Civil service & BankPO aspirants of that era, were
relatively “Stress free” compared to present generation.
Problem starts with Great American depression (’29) => sharemarket and companies of US
and Europe collapse= raw material import declines = desi merchants cannot repay loan EMIs =
Indians banks starts collapsing one by one.
therefore, British Indian government setups Reserve bank of India to supervise over these
banks (’34)
Banking sector Post Independence
Click to Enlarge
from mid-50 onwards, there is gradual expansion of banking sector in India

SBI, ICICI, PNB, BoB all start opening more and more branches.
but still target audience= merchants, urban (upper) middle class and industrial houses
Branches increased? YES
Rural penetration? NO
Did they help aid in Five year plans like giving cheap loans to farmers and micro-
enterprises? NO
All these banks were in the hands of industralists. (who owned majority shareholding => can
vote majority of board of directors=> bank’s policy decision will only be made to suit those
industrialists e.g. opening branches near factory-townships, giving loans @cheap rate for
setting up new factories and so on….)
Nationalization
Government gets impatient with ^all this.

starts nationalizing banks (By taking over the ownership from those industrialists)
How
Year who?
many?
’55 1 Imperial bank (SBI)
’69 14 banks with >50 cr. deposits.
banks with >200 cr. deposits (Andra, Vijaya,

’80 6
Oriental bank of commerce etc.)
Nationalization: more problems
1. In theory, nationalization =government becomes majority shareholding in those banks =>

government can pick board of director of her choice = bank takes decisions to suit
government’s Five year plan requirements= everyone’s happy, right? nope
2. In reality, nationalization =created more problem than it solved. for example
3. Now all the board members = politicians, their relatives, retired IAS/IPS etc. Result?
Professionalism =nope, sycophancy=yes.
4. Banks were forced to give loans @throwaway prices to farmers/ small enterprises, sometimes
even cost of giving loan (staff salary, light bill, office rent etc.) would be higher than the profit
involved.
5. Local politician interfered in operations. Run “loan mela” in our Constituency, open all branches
in RaiBareily and Amethi only, pass applications of our chamcha-log. They would get lakhs of
rupees @4% interest rate (to buy cattle) and then circulate the same money to farmers @36%
interest rate and so on…
6. When banks tried to recover loan money from such political elements, t hey’d get stay order
from courts, then “taarikh pe taarikh”.
7. This politicization even came into Bank employee unions- they’d always demand higher wages
and lower working hours, irrespective of how much profit bank made.
8. adding insult to injury, RBI kept the CRR and SLR very high (15 & 40% respectively)
9. =very less money left for banks to lend.
10. Business man cannot get easy loans = no business expansion =export declines =in a way all
this contributed to the Balance of Payment crisis (BoP) in 1991.
moral of the story = nationalization is not a solution – even if Sahara, NSEL, Ramalinga Raju, Ketan
Parekh, Harshad Mehta or Mr.XYZ is doing scam- that doesn’t mean you should nationalize
everything.
Narsimhan Committee I (1991)
By government of India in 1991. It recommended following:

recommendation result?
Government / RBI mustnot

regulate the banks’ loan
RBI adopts BENCHMARK
interest rates. Banks should
PRIME LENDING RATE (BPLR)
be allowed to decide their
=> nowadays Base rate system.
home loan, bike loan etc
rates by themselves.
setup Debt recovery tribunals.

DRT setup in 1993 =>
so loan defaulters cannot get
laterSARFAESI Act in 2002 to
stay orders from courts, no
give them more powers.
more “Taarikh pe taarikh”
done. banks can open branches

Liberate Branch expansion anywhere. only condition 25% of
policy. Let the banks open the new branches each year must
branches outside Raibarely be setup in rural areas. For more
and Amethi also. read Nachiket Committee
article.
Reduce CRR and SLR so

Done, gradually reduced. from
banks are left with more
(15,40)=>(4,23)
money to lend.
NBFC regulatory
framework done
done, SBI shares sold, nowadays

government should reduce its
government owns ~60%. (this
shareholding from public
facilitates entry of professionals
sector banks.
in the board of directors)
Allow entry of private sector done, leads to first round of bank

banks and foreign banks. licences, explained below:
Bank licences: 1s t Round (1993)
RBI invites application 1993

New private banks start Operation: 1994-95 onwards
Total ten private banks given licences: 6 still running + 4 closed down.
6 running
1. ICICI
2. HDFC
3. UTI=>became Axis bank (2007)
4. IDBI
5. Indus
6. DCB
All of above running successfully, so that gives us “positive arguments”- that not all private entities
are seamstress. in fact, ICICI, HDFC, Axis = top banks of India, even have presences abroad,
employ lakhs of people. Hence no harm in giving bank licences to private players.
4 closed down
merged
Bank why?
with
recall Ketan Parekh- he took money

from Madhupura cooperative Bank,
A’bad and used it to run scam in
Global Oriental
Sharemarket. Same Ketan had also
Trust bank of
taken some money from Global Trust
Bank Commerce
bank also=> news stories =>junta
panics and runs to take out all money=>
business collapsed.
loss making. hardly any depositors and

Bank of Centurion
loan takers, couldn’t stand in
Punjab bank
competition against SBI, ICICI, BoB etc.
Centurion
HDFC same as above
bank
Times
HDFC same as above
Bank
These four #EPICFAIL banks give us the “negative arguments” that private companies must not be
given bank licences. Because they can also close down like ^these, creating panic among the
clients, blood pressure, heart attacks and suicides.
Anyways, moving on
Narsimhan Committee II (1998)
1. Introduce Voluntary retirement scheme (VRS) in public sector banks.

2. Legal reforms for loan recovery. =>SARFAESI 2002
3. Computerization, electronic fund transfer, legal framework
4. Payment and Settlement Act=>Retail (ECS, NEFT, Card) + Wholesale (RTGS)
5. Continue allowing entry of private banks and foreign banks.
New Bank licences 2 nd round (2001)
2001: applications invited

2003-04: winners launch banks.
From the earlier #EPICFAIL of those four banks, RBI also learned lesson.
This time RBI gave licence only two strongest contenders:
1. Kotak Mahindra
2. Yes Bank
New Bank licences 3r d Round (2013-14)
2010: Finance minister says we need to give more licences.

2013, February: RBI invites applications with following conditions:
Conditions/guidelines for new bank licence application:
1. must include class 10-12-college marksheet, school leaving certificate and three passport
sized photos
2. 10 years’ successful work-ex (=”Fit and proper” criteria)
3. minimum capital Rs.5 billion
4. Will have to get shares listed on stock exchange within three years, bring down voting rights to
15% within 12 years. why?
say Anil Ambani gets licence, in the beginning he’d have ~100% ownership and decision
making. But in the long run such “one man game show” = not good in banking sector. So he’ll
have to get the shares listed within three years.
once shares are listed, junta starts buying those shares= they elect the board of directors
(BoD) and then BoD makes policy decisions of the bank, appoints CEO and top executives and
so on.
By 15 years, Anil should sell majority of his shares to junta- so that he holds barely ~40% or
less of the bank shares = he cannot have lot of “say” in bank’s decision making = bank doesn’t
run according to his whims and fancies =rational decision making.
Anyways moving on to the rules
5. foreign shareholding must not be more than 49% (for the first five years)
6. 50% of the directors should be independent (=not chosen by majority shareholder e.g. Anil)
7. Such bank must not invest in shares/bonds of its parent group (e.g. Anil’s telecom/electricity
business)
8. must have viable business plan
9. must open atleast 25% branches in the unbanked rural areas. (as per latest census there are
~10000 such places)
10. Have to comply with PSL (priority sector lending) norms.
Many other technical rules but for descriptive/interview answer- above 9-points sufficient.
Total 26 applied, including Anil Ambani, Birla, Bajaj, Tata, Muthoot, Indian post.
later two left (TATA, Videocon)
+ one came (KC Land and finance ltd.)
Thus 25 left.
Bimal Jalan Committee
Now Rajan had to decide winners among those 25 applicants.
Sep 2013: Rajan sets up RBI High level advisory Committee to process those applications.
Bimal Jalan (Chairman) Former RBI governor
Usha Thorat Ex-RBI Deputy Governor
C B Bhave Ex-Sebi chairman
Nachiket Mor RBI board member
Important: Bharatiya Mahila Bank also launched in Sep’13 (but its public sector bank, has nothing to
do with this “third” round of Bank licences or Bimal Jalan Committee)
Anyways, moving on
November
Bimal first meeting
2013
February
Bimal submits report
2014
March Rajan fears Election commission’s model code of

2014 conduct, seeks their approval.
31st March EC gives approval
Two winners announced. (Bandhan Microfinance and

2st April
IDFC)
Bandhan Microfinance and IDFC
IDFC (Infrastructure Development

Bandhan Microfinance
and Financial Corporation)
West Bengal Mumbai
Micro-finance company infrastructure finance company
Chandra Shekhar Ghosh Rajiv Lall
net worth 1100 Cr., 45% net worth 21000 cr., but rural
branches in rural areas presence low.
These two are given only “in-principle” approval. Meaning
In principle approval
Within 18 months
must get net worth Rs.1000 crore
Must open 25% branches in unbanked rural areas.
once they fulfill above conditions, RBI will give them licence under Banking Regulation Act, 1949
[Sec.22(1)]
Once they get licence under BRA, then we can open current account, savings account etc.
RBI has also prohibited the promoters (Ghosh and Lall) to hold CEO position in their respective
banks. This is meant to prevent conflict of interest. Because in past, Global Trust bank’s CEO
Ramesh Gelli was accused of involved in Ketan Parekh scam.
Curiously though Yes Bank’s promoter Rana Kapoor enjoys both MD and CEO position in his bank!
India post
For Indian postal department, Bimal Jalan said “RBI should consult separately with government
and give licence if necessary.”
Kumar Mangalam Birla’s name involved in Coal block scam, Anil Ambani in 2G case, hence
licence not given.
What is Differential licences?
Total 25 applied, but only two won so what about the remaining 23 contenders? Will they get
any consolation prize? Yes.

Rajan said they can later apply for Differential bank licences.
Differential bank licences = for opening payment banks, wholesale banks etc (who’re not “full”
banks like SBI, PNB etc.)
for more on these differential banks read following articles on Nachiket Committee:
1. Wholesale Banks
2. Payment Banks
New Private banks: Pro and Against arguments
Anti arguments Pro arguments
Existing banks not sufficient for

100% financial inclusion.
only one in two Indians have bank
account
Only one in seven Indians gets
loan from banks (others have to
rely on the evil money lenders who
There is no need for
charge 36% compound interest
additional private banks,
rate!)
existing banks sufficient.
As per Census 2011
Only 67% of Urban households

getting banking services.
Only 54% Rural households
getting banking services.
well in that case,

government should Throwing sakaari money,
launch some Rajiv subsidies and schemes to solve
Gandhi scheme to open every problem = bad idea.
Business has to become vibrant
bank accounts for
by itself.
everyone, there is no
need to get new private It is true both Bandhan and IDFC
banks! Besides, these are “mosquitos” compared to
two (Bandhan and IDFC) elephants like SBI and ICICI but
are too small to be any every maestro was an amateur
someday.
relevant in “financial
inclusion”.
http://mrunal.org/2014/04/economy-new-bank-licences-bandhan-idfc-bharatiya-mahila-bank-differential-bank-licences-bimal-jalan-committee-narsimhan-c… 10/14
as a Microfinance company,
Bandhan cannot open savings
account / current account etc
(Because they don’t have bank
licence)
as a result, such microfinance
As per your own table, companies have to borrow money
Bandhan already has from other banks, NABARD etc
45% of her branches in @12-15% interest + have to
rural area as maintain profit margin=> they give
microfinance company, loans to poor people yes, but at
then why do they need 23-25% interest rate.
bank licence? They’re but if same Microfinance
already doing financial company was given bank
inclusion! licencee, they can accept public’s
deposit money under savings
account ~4% interest, fixed
deposit ~9% interest => cheaper
way to arrange loan money. can
give loans to poors at reasonable
rate like 10-15%
In the first round, ten

banks were given
The same licensing round gave us
licence, four of them
giants like ICICI, Axis bank and
closed down…..private
HDFC. It is wrong to think every
sector cannot compete
private player is out there only to bully,
with existing giants. They
loot and steal.
try to take ‘shortcuts’,
hence all the scams.
The same ICICI Bank, RBI has taken quick and firm action
HDFC Bank and Axis against those three banks. And the
Bank were caught inquiry revealed it wasn’t the mass
violating KYC norms and scale organized money laundering
doing money laundering operation but irregularity on part of
case in the Cobra post certain branch managers to
sting operation. overcome the “targets”.
These two small players

cannot even afford to They don’t need to open ATMs
launch all India ATM anyways, because of the “White label”

network, forget about ATM scheme.
opening “branch” offices.
In the early 90s, all nationalized banks

were heading towards #EPICFAIL, so
to correct the course, RBI had to get in
RBI should gave given more players to breed competition.
licences to more Same is not the case today- two new
applicants, like they did banks are good enough. If Rajan gave
in the 90s (ten licences). licence to 15-20 applicants at once =>
too much competition => predatory
pricing like in aviation industry =>
smaller players will be wiped out.
Public sector banks are

In the end, Business is all about the
already bleeding
survival of the fittest. Public sector
because of the heavy
banks and their “trade unions” should
marketing and teaser
learn to perform or perish. Customer
rates offered by Private
deserves better services. Just to
banks. Two more such
make life easier for sarkaari banks,
banks will increase the
we must not prevent the entry of
misery of the public
private sector.
sector banks.
Rajan’s “American”
ideas of free market,
Just two new banks cannot create
wholesale banks,
Subprime crisis. RBI is much more
differential licenses etc.
vigilant and strict than their American
will ruin Indian banking
counter part US feds. It is wrong to
sector and Economy.
assume that Rajan comes from
What works in USA
America so he is automatically an evil
need not automatically
capitalist, and all the “hushiyaari”
work in India as well.
(smartness) is with Newspaper
This will lead to
columnists in The***** only.
subprime crisis like
disaster.
More pro-con arguments can be added, post them in comments below!
Bharatiya Mahila Bank (2013)
This has nothing to do with Bimal Jalan Committee or third round of private bank licences. But to
confuse you in MCQs, the examiner will deliberately include some facts related to Mahila bank.
Therefore, you must know the basics:
Budget 2013: Chindu announced to open this bank with 1000 crore Rs. (=100% State Owned /
public sector bank.)
Keep in mind, Chindu also setup “Nirbhaya fund” for women security initiatives. But that’s
separate 1000 crore fund and this is separate 1000 crore bank. (tricky MCQ)
Concept is not new: Pakistan and Tanzania already setup such banks in past.
MBN Rao Panel prepared blue print (he was chief of Canara bank)
Sept. 2013: licence given
November 2013: bank launched on Indira Gandhi’s b’day.
HQ= Delhi but since assembly election was going on, hence to follow the model code of
conduct, they launched the bank from Mumbai
How is it a Mahila Bank?
Boss Usha Anantha-Subramanian =woman

Board of Directors=all women.
but staff = male + female
mid-level staff from BoB, PNB on deputation= male + female.
Customers (Depositors) = male + female. (no distinction among them, both get same interest
rate on their savings account / FD etc.)
BUT Loan giving => predominantly to women.
Women entrepreneurs can get loans up to Rs 1 crore without collateral (meaning they don’t
have to mortgage their house/factory/jewellary)
kitchen loans, education loans, small home-based catering businesses
Projects for Skill development, financial literacy among women.
hence the name “Mahila Bank”- because it’ll predominantly cater the credit needs of women
entrepreneurs and Self help groups.
Business plan of Mahila Bank?
1. By March 2014: 25 branches in capitals/major cities of India

2. 25% branches in unbanked rural areas.
3. By 2020: 700+ branches; 60k cr business
Software
as such most desi banks use “finacle” core-banking software designed by Infosys
But this Mahila bank got Core Banking Software by FIS (American Co.)
(^ya this type of GK essential for IT-graduates for the bank interview stage.)
Why Mahila Bank is mere publicity stunt?
(Interview Q.) Bharatiya Mahila Bank is a mere symbolic exercise for feel good publicity. Do you
agree? Yes/No and Why?
I already mentioned the Positive points 1 cr. loan without collateral, skill development for women etc.
But in Group discussion/ interview, you need to be aware of the negative points as well, in case the
other party decides to play “Devil’s advocate”.
Mahila Bank is mere tokenism, without substance because:
1. SBI, PNB, BoB better suited, they have pan-India presence including in rural areas. Govt.
already majority shareholder. Could have launched the 1 crore without collateral scheme
without Mahila Bank.
2. 25% rural branching: duplication of effort.
3. In the first phase focus on state capitals and UT = real need of women financial inclusion is in
rural areas and not those big cities.
4. Mid-level executives all “imported” from BoB, PNB etc. such deputed staff usually don’t have or
motivation to put their blood and sweat in making this new bank successful. Their loyalty
remains with their own parent bank only.
5. They’re offering 4.5%/5% interest rate on savings account but pan India presence necessary,
otherwise customers won’t feel attracted. Besides private banks like Kotak already offering 6%
Visit Mrunal.org/Economy For more on Money, Banking, Finance, Taxation and Economy.

New Bank Licences - Ready Revision Note For IBPS & UPSC

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

New Bank Licences - Ready Revision Note For IBPS & UPSC

Загружено:

Авторское право:

Доступные форматы

7/29/2014 New Bank licences: Ready revision note for IBPS & UPSC

5. Narsimhan Committee I (1991)

8. New Bank licences 2nd round (2001)

Banking sector in British India

There were two types of banks

British Banks “Swadeshi” Banks

First, East India

Their target audience = Target audience= big merchants,

By early 30s, there were >1200 banks in India!

Banking sector Post Independence

from mid-50 onwards, there is gradual expansion of banking sector in India

Government gets impatient with ^all this.

’55 1 Imperial bank (SBI)

’69 14 banks with >50 cr. deposits.

banks with >200 cr. deposits (Andra, Vijaya,

Nationalization: more problems

1. In theory, nationalization =government becomes majority shareholding in those banks =>

Narsimhan Committee I (1991)

By government of India in 1991. It recommended following:

Government / RBI mustnot

setup Debt recovery tribunals.

done. banks can open branches

Reduce CRR and SLR so

done, SBI shares sold, nowadays

Allow entry of private sector done, leads to first round of bank

Bank licences: 1s t Round (1993)

RBI invites application 1993

recall Ketan Parekh- he took money

loss making. hardly any depositors and

Narsimhan Committee II (1998)

1. Introduce Voluntary retirement scheme (VRS) in public sector banks.

New Bank licences 2 nd round (2001)

2001: applications invited

This time RBI gave licence only two strongest contenders:

New Bank licences 3r d Round (2013-14)

2010: Finance minister says we need to give more licences.

Conditions/guidelines for new bank licence application:

Anyways moving on to the rules

Bimal Jalan Committee

Now Rajan had to decide winners among those 25 applicants.

Bimal Jalan (Chairman) Former RBI governor

Usha Thorat Ex-RBI Deputy Governor

C B Bhave Ex-Sebi chairman

Nachiket Mor RBI board member

March Rajan fears Election commission’s model code of

31st March EC gives approval

Two winners announced. (Bandhan Microfinance and

Bandhan Microfinance and IDFC

IDFC (Infrastructure Development

West Bengal Mumbai

Micro-finance company infrastructure finance company

Chandra Shekhar Ghosh Rajiv Lall

These two are given only “in-principle” approval. Meaning

What is Differential licences?

any consolation prize? Yes.

New Private banks: Pro and Against arguments

Anti arguments Pro arguments

Existing banks not sufficient for

Only 67% of Urban households

well in that case,

In the first round, ten

These two small players

launch all India ATM anyways, because of the “White label”