RBI must reconsider the present applicants and, possibly, have specific discussions in areas of operation and how soon they can achieve the goal of ensuring opening of branches and making available banking operations in small villages and towns, across the country

After a nine month wait, the Reserve Bank of India (RBI) delivered two babies in the form of approvals, for IDFC and Bandhan Financial Services to start private banks.  This is valid for 18 months within which both institutions have to comply with all the RBI formalities, as laid down, for new banks. Once these are met, a regular banking licence will (or may?) be issued by RBI, until which time, both cannot do any "banking operations" as such!
 

Effectively, two new banks with "universal" banking operations may start functioning somewhere around April 2016, give or take couple of months! 
 

IDFC (Industrial Development Finance Corporation) was set up in 1997, based on the Expert Group on Commercialization of Infrastructure Projects, by Rakesh Mohan Panel, based in Chennai, with offices now in Mumbai, Bangalore and Delhi.  During the transition process, most of IDFC's assets will be transferred to the bank, which will be called: "IDFC Bank", now that the approval has been received from RBI.
 

From what has appeared in the press, IDFC are not likely to grow the loan book in the next 18 months!  Rather, they would concentrate, in the first three years to stabilise, comply and experiment for the work ahead.  In the next three years, IDFC Bank will consolidate, learn and start to prepare for scale of operations ahead; and finally three years will be spent returning to growth and retaining it.
 

It may be recalled that IDFC issued its initial public offering (IPO) in 2005.  It employs over 500 people, and for the financial year ending March 2013 the total income is reported at Rs8,148 crore with a net profit of Rs836 crore.  The gross loan book amounted to Rs56,895 crore with gross approvals at Rs26,567 crore and a disbursement of Rs17,656 crore. It is heavily concentrated in the infrastructural development projects and operates from four main cities in the country.
 

What about the ownership composition at the moment? Government owns 17.24% in IDFC while 51.39% is held by foreign interests.  So, when the final licence to operate as a bank is issued to IDFC Bank, the stock-holding will also undergo a suitable change. 
 

In 2003-04, both Kotak Mahindra Bank Ltd and Yes Bank Ltd were licensed to operate as private banks, and, as we know them today, they are doing well. 
 

The current guidelines require new banks to set up at least 25% branches in unbanked rural locations with a population up to 9,999 people.  For a start, as far as IDFC are concerned, they have a herculean task before them; first to make a drastic change in their outlook to cater to the needs of the “aam aadmi” by going rural. Second, by retaining the parent IDFC organization, they may continue to do infrastructure financing, which involves crores of rupees, tune themselves to finance smaller operations running to just couple of thousand rupees here and there!  It will be tough going! 
 

In so far as Bandhan Financial Services are concerned, luckily, they have the inherent advantage of being the largest microfinance institution in the country with 22% market share. Since their inception in 2001, as a credit financing operator, they have enormous experience in empowering women, who form the bulk (55 lakh) borrowers, but whose loan repayment rate of 99.5% speaks well of the organisational acumen.  It appears from the press reports, that Bandhan currently sells priority sector loans to commercial banks.
 

However, the company currently borrows from commercial banks at 12.5% to 13% and lends it at nearly 23% to these women entrepreneurs’, who gladly pay this rate, considering the whopping rate of 200% to 300% charged by the exploiting moneylenders in the rural areas.  To a great extent, Bandhan has been able to reduce this menace of moneylenders in the Eastern states in the country, where they operate extensively.  Thus, as a commercial bank, they hope to obtain bank deposits at a relatively cheaper rate as this will enable them, in return, to lower their lending rates to these women, who are likely to be their main customers.
 

And yet, transfer of microfinance business to the proposed new bank is not going to be easy, according to Chandra Sekhar Ghosh, CMD of Bandhan, who hopes to achieve all the essential qualities of good banking by savings, credit, insurance and remittance.  But for Bandhan, which currently operates in 22 States and four union territories, with 12,961 employees, it will not be a difficult task.
 

RBI governor Raghuram Rajan's assurance that banking licence will now be made available on tap, and that, the rest of the applicants could reapply again for RBI to consider. This assurance may be "soothing" but does not serve the purpose, which, initially, and even now stands unchanged at making "banking service" available to one and all, particularly in rural areas. About 50% to 60% of the people in the country still do not have access to banks.  Even if applications to open accounts are made available in two/ three languages, these serve no purpose because of the literacy factor.  Most money lenders in rural areas, apart from charging exorbitant rates, also get land-ownership documents "signed" by obtaining thumb prints (whoever has this little benefit of ownership), and for rest of the lifetime, the borrower only pays this interest, with loan capital remaining intact!
 

Anyway, in arriving at the conclusion that both IDFC and Bandhan are the most suitable candidates to set up banks, obviously, the Jalan committee ought to have employed a system of grading (marks?) in assessing the applications.  We do not know the details, but, whatever is the methodology applied, it would appear that there would be at least a few more in the first five or seven "prospective" candidates who are also just as qualified, in terms of their integrity, approach and vision.
 

While, IDFC has literally a 9-year programme ahead to be able to reach its targeted clients; Bandhan has already a strong base of 55 lakh borrowers in rural areas who repayment track record is admirable.  So, Bandhan has much better chance to succeed in making it possible for "banking facilities" as such to reach rural folks, sooner than later.
 

Based on the above premise, RBI must reconsider the present applicants and, possibly, have specific discussions in areas of operation and how soon they can achieve the goal of ensuring opening of branches and making available banking operations in small villages and towns, across the length and breadth of the country.
 

If five institutions are selected, simply in order of grades, with IDFC and  Bandhan being No: 1 and No: 2, RBI could pick No: 3 to No: 7 and make this offer, there would be a giant step forward in making true the hope of banks reaching the rural areas in the next three years.  If the intentions are to go through such longish processes, it will be probably another five-seven years before new banks can come into operation.
 

RBI needs to rethink on these issue, and they have economists and experts who can modify such proposals to suit the national needs! 
 

India Post has a terrific advantage of being everywhere, but does not have the required banking expertise.  Why not they be linked with someone like State Bank to be their mentor and after a 7/10 year "understudy'' experience become independent operator?

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)