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[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
Posted By On 17/04/2014 @ 5:02 pm In Economy | 132 Comments

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Prologue
Banking sector in British India
Birth of RBI
Banking sector Post Independence
Narsimhan Committee I (1991)
Bank licences: 1st Round (1993)
Narsimhan Committee II (1998)
New Bank licences 2nd round (2001)
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. its 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 Devils advocate type interview questions, we need to go back in history:

Banking sector in British India

There were two types of banks
British Banks
First, East India company establishes
three Presidencies in India- Bombay,
Bengal and Madras
Three Presidency banks setup in those
cities. Later merged into one Imperial
bank (21)=> SBI (55)
Their target audience = British army, civil
servants and judges

Swadeshi Banks

Parallel to British banks, Indian banks also setupAllahabad Bank, Punjab national bank (PNB), Bank of
Baroda (BoB), Canara bank etc.

Target audience= big merchants, particularly raw-material

exporters in 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=> banks 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)
Year How many? who?
55 1
Imperial bank (SBI)
69 14
banks with >50 cr. deposits.
80 6
banks with >200 cr. deposits (Andra, Vijaya, 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 governments Five year plan
requirements= everyones 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 heyd get stay order from courts,
then taarikh pe taarikh.
7. This politicization even came into Bank employee unions- theyd 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 doesnt mean you should nationalize everything.

Narsimhan Committee I (1991)

By government of India in 1991. It recommended following:
recommendation
Government / RBI mustnot regulate the banks loan
interest rates. Banks should be allowed to decide
their home loan, bike loan etc rates by themselves.
setup Debt recovery tribunals. so loan defaulters
cannot get stay orders from courts, no more
Taarikh pe taarikh

result?
RBI adopts BENCHMARK PRIME LENDING RATE (BPLR)
=> nowadays Base rate system.
DRT setup in 1993 => later SARFAESI Act in 2002 to give
them more powers.

Liberate Branch expansion policy. Let the banks

open branches outside Raibarely and Amethi also.

done. banks can open branches anywhere. only condition

25% of the new branches each year must be setup in
rural areas. For more read Nachiket Committee article.

Reduce CRR and SLR so banks are left with more

money to lend.

Done, gradually reduced. from (15,40)=>(4,23)

NBFC regulatory framework

government should reduce its shareholding from
public sector banks.
Allow entry of private sector banks and foreign
banks.

done
done, SBI shares sold, nowadays government owns
~60%. (this facilitates entry of professionals in the board
of directors)
done, leads to first round of bank licences, explained
below:

Bank licences: 1st 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
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6.

ICICI
HDFC
UTI=>became Axis bank (2007)
IDBI
Indus
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
Bank
Global
Trust
Bank

merged
with

why?

recall Ketan Parekh- he took money from Madhupura cooperative Bank, Abad and used
Oriental
it to run scam in Sharemarket. Same Ketan had also taken some money from Global
bank of
Trust bank also=> news stories =>junta panics and runs to take out all money=>
Commerce
business collapsed.
Centurion loss making. hardly any depositors and loan takers, couldnt stand in competition against
bank
SBI, ICICI, BoB etc.

Bank of
Punjab
Centurion
HDFC
bank
Times
HDFC
Bank

same as above
same as above

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)

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5.

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

Legal reforms for loan recovery. =>SARFAESI 2002
Computerization, electronic fund transfer, legal framework
Payment and Settlement Act=>Retail (ECS, NEFT, Card) + Wholesale (RTGS)
Continue allowing entry of private banks and foreign banks.

New Bank licences 2nd 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 3rd 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:

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4.

must include class 10-12-college marksheet, school leaving certificate and three passport sized photos
10 years successful work-ex (=Fit and proper criteria)
minimum capital Rs.5 billion
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 hed have ~100% ownership and decision making. But in
the long run such one man game show = not good in banking sector. So hell 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 banks decision making = bank doesnt 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)

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50% of the directors should be independent (=not chosen by majority shareholder e.g. Anil)
Such bank must not invest in shares/bonds of its parent group (e.g. Anils telecom/electricity business)
must have viable business plan
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 Sep13 (but its public sector bank, has nothing to do with
this third round of Bank licences or Bimal Jalan Committee)
Anyways, moving on
November 2013 Bimal first meeting
February 2014 Bimal submits report
March 2014
Rajan fears Election commissions model code of conduct, seeks their approval.
EC gives approval
31st March
2st April

Two winners announced. (Bandhan Microfinance and IDFC)

Bandhan Microfinance and IDFC

Bandhan Microfinance
IDFC (Infrastructure Development and Financial Corporation)
West Bengal
Mumbai
Micro-finance company
infrastructure finance company
Chandra Shekhar Ghosh
Rajiv Lall
net worth 1100 Cr., 45% branches in rural areas net worth 21000 cr., but rural 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 banks CEO Ramesh Gelli was accused of
involved in Ketan Parekh scam.
Curiously though Yes Banks 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 Birlas 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 (whore 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

There is no need for additional private

banks, existing banks sufficient.

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 charge 36%
compound interest rate!)
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 launch

some Rajiv Gandhi scheme to open bank
accounts for everyone, there is no need to
get new private banks! Besides, these two
(Bandhan and IDFC) are too small to be any
relevant in financial inclusion.

Throwing sakaari money, subsidies and schemes to solve

every problem = bad idea. Business has to become vibrant
by itself.
It is true both Bandhan and IDFC are mosquitos
compared to elephants like SBI and ICICI but every
maestro was an amateur someday.

As per your own table, Bandhan already has

45% of her branches in rural area as
microfinance company, then why do they
need bank licence? Theyre already doing
financial inclusion!

as a Microfinance company, Bandhan cannot open

savings account / current account etc (Because they dont
have bank licence)
as a result, such microfinance companies have to borrow
money from other banks, NABARD etc @12-15% interest +
have to maintain profit margin=> they give loans to poor
people yes, but at 23-25% interest rate.
but if same Microfinance company was given bank
licencee, they can accept publics 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

licence, four of them closed down..private
sector cannot compete with existing giants.
They try to take shortcuts, hence all the
scams.
The same ICICI Bank, HDFC Bank and Axis
Bank were caught violating KYC norms and
doing money laundering case in the Cobra
post sting operation.
These two small players cannot even afford
to launch all India ATM network, forget
about opening branch offices.

The same licensing round gave us giants like ICICI, Axis bank and
HDFC. It is wrong to think every private player is out there only to
bully, loot and steal.
RBI has taken quick and firm action against those three banks.
And the inquiry revealed it wasnt the mass scale organized
money laundering operation but irregularity on part of certain
branch managers to overcome the targets.
They dont need to open ATMs anyways, because of the White
label ATM scheme.

In the early 90s, all nationalized banks were heading towards

#EPICFAIL, so to correct the course, RBI had to get in more
RBI should gave given licences to more
players to breed competition. Same is not the case today- two
applicants, like they did in the 90s (ten
new banks are good enough. If Rajan gave licence to 15-20
licences).
applicants at once => too much competition => predatory pricing
like in aviation industry => smaller players will be wiped out.
Public sector banks are already bleeding
In the end, Business is all about the survival of the fittest. Public
because of the heavy marketing and teaser sector banks and their trade unions should learn to perform or
rates offered by Private banks. Two more perish. Customer deserves better services. Just to make life
such banks will increase the misery of the easier for sarkaari banks, we must not prevent the entry of private
public sector banks.
sector.

Rajans American ideas of free market,

Just two new banks cannot create Subprime crisis. RBI is much
wholesale banks, differential licenses etc. more vigilant and strict than their American counter part US feds.
will ruin Indian banking sector and
It is wrong to assume that Rajan comes from America so he is
Economy. What works in USA need not
automatically an evil capitalist, and all the hushiyaari
automatically work in India as well. This will (smartness) is with Newspaper columnists in The***** only.
lead to 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 thats 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 Gandhis bday.
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 dont 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 itll 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 Devils 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 dont 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. Theyre offering 4.5%/5% interest rate on savings account but pan India presence necessary, otherwise
customers wont feel attracted. Besides private banks like Kotak already offering 6%
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