Bank licence seekers must commit to govt's financial inclusion agenda: Subbarao

NEW DELHI: Prospective bank licence seekers, be it industrial houses or finance companies, will have to prove their commitment to the government’s social agenda of ‘financial inclusion’ if they are to stand any chance of getting one, Reserve Bank of India Governor Duvvuri Subbarao said.

Foreign banks that want to expand in India may have to mandatory set up subsidiaries if they are serious about reaping the fruits of Indian growth, although the new rules are yet to be finalised, Subbarao signalled.

The central bank, which will be issuing an undisclosed number of licences in the next few months, is expected to lean towards taking banking to the poor rather than let a few be housed in cities and become trading power houses instead of aiding real economy.

“One of the criteria for evaluating the applications that we get in due course of time will indeed be their business plan for financial inclusion,” Subbarao told a bankers’ conference in the national capital. “Banks consider this as an obligation and not an opportunity.”

Prime Minister Manmohan Singh’s government and RBI plan to have more banks bring in more people under banking services, which include no-frill accounts. More bank accounts could also help the government reduce pilferage of its social spending. But more than four decades after nationalisation of banks, just 30,000 of 6 lakh habitations have access to banks.

Forty per cent of the population doesn’t have accounts and less than 10% has life insurance cover. Although nationalisation has led to more branches being opened in rural areas, the reach has lagged behind. Private banks, which were given licences in the early 90s, and foreign banks concentrate in metro regions where wealth has been growing since the beginning of economic reforms in 1991.

Many industrial houses such as Anil Dhirubhai Ambani Group’s Reliance Capital , and finance companies such as Shriram Transport Finance and Religare Enterprises are expected to seek licences to benefit from the rise in middle-class income. But the financial inclusion condition may deter some as it could be a drag on profitability.

“We have shown interest when RBI came out with the announcement, and in terms of financial inclusion, we as a group have always followed it. But now we are waiting for RBI guidelines to see if we are eligible or not,” says R Sridhar, MD, Sriram Finance.

Saurabh Tripathi, partner and director of Boston Consulting Group, said technology had made financial inclusion viable. “This has been the stance of RBI from the very beginning and is hardly surprising. Today technology, regulation and market structure have evolved sufficiently that a concrete business plan for financial inclusion can indeed be made,” he said.

In his Budget speech, Finance Minister Pranab Mukherjee said RBI would come out with the final guidelines on bank licences before the “close of this financial year” or by March 31.

Those wishing to set up new banks are not the only ones eager for RBI to show its hand. Global banks are also keen to hear from the regulator about their future role in the world’s second fastest-growing economy after China.

The near-20% loan growth, rising takeovers by Indian companies, and scope for wealth management have prompted many global banks such as HSBC Holdings and Standard Chartered to expand in India. The strategy is also seen as a buffer against an uncertain future for banks in the West with no clear sign of recovery.

“If you said choose one country in the world that you could expand into, that would be India,” Douglas Flint, chairman, HSBC Holdings, told ET in an interview on Wednesday. “You can have one pick and you can do whatever you like, it would be India. I think the scale of opportunities is huge.” But the expansion of these banks will also depend on their willingness to convert their operations into subsidiaries. These banks are now branches of their overseas companies.

“There will be incentives to encourage foreign banks to come as subsidiaries by way of almost national treatment,” Subbarao told the conference presided by Josef Ackermann, chief executive at Deutsche Bank, which operates in India. “There will be opportunities and obligations on a par with domestic banks. “

RBI had circulated draft norms on increasing the role of foreign banks in India that allow them to set up branches at their will in smaller cities, barring some security-sensitive regions, and list on stock exchanges with at least a 25% Indian holding. They will have a minimum capital adequacy ratio of 10% and a lower priority sector lending target than domestic private peers. The thrust on a domestic subsidiary model comes after the 2008 credit crisis forced many global banks to cut operations in developing countries. There will be checks too on them.

“There is a risk that the foreign banking system will dominate the system of the country which is amplified during times of stress which we have seen before and during crisis,” the RBI governor said. “Foreign banks in emerging economies vigorously built business in good times, but were equally vigorous to retrench during the crisis. The question is, are foreign banks going to be fair weather friends?”

On the strength of Indian banks, Subbarao said they are quite comfortable in meeting the capital norms, but may have to raise capital because of their strong loan growth.

Source: EconomicTimes