New Bank Licences_ Ready Revision Note for IBPS & UPSC

8/12/2019 New Bank Licences_ Ready Revision Note for IBPS & UPSC

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

http://mrunal.org/2014/04/economy-new-bank-l icences-bandhan-idfc-bharatiya-mahila-bank-differential-bank-l icences-bimal-jalan-committee-narsimhan-co 1/14

[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

CSAT

1. Prologue

2. Banking sector in British India

3. Birth of RBI

4. Banking sector Post Independence

5. Narsimhan Committee I (1991)

6. Bank licences: 1stRound (1993)

7. Narsimhan Committee II (1998)

8. New Bank licences 2ndround (2001)

9. New Bank licences 3rdRound (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 MahilaBank?

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 andIDFC 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

days

26

hrs

23

mins

11

sec.

18
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04/economy-new-bank-licences-bandhan-idfc-bharatiya-mahila-bank-differential-bank-licences-bimal-jalan-committee-narsimhan-committee-arguments-favor-bank-nationalization-historic-evolu.html#45http://mrunal.org/2014/04/economy-new-bank-licences-bandhan-idfc-bharatiya-mahila-bank-differential-bank-licences-bimal-jalan-committee-narsimhan-committee-arguments-favor-bank-nationalization-historic-evolu.html#10http://mrunal.org/2014/04/economy-new-bank-licences-bandhan-idfc-bharatiya-mahila-bank-differential-bank-licences-bimal-jalan-committee-narsimhan-committee-arguments-favor-bank-nationalization-historic-evolu.html#1


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There were two types of banks

British Banks Swadeshi Banks

First, East India

company establishes

three Presidencies inIndia- Bombay,

Bengal and Madras

Three Presidency

banks setup in those

cities. Later merged

into one Imperial bank

(21)=> SBI (55)

Parallel to British banks, Indian

banks also setup- Allahabad

Bank, Punjab national bank

(PNB), Bank of Baroda (BoB),

Canara bank etc.

Their target audience =

British army, civil servants

and judges

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


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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.
https://www.flickr.com/photos/97816112@N02/13909976043


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starts nationalizing banks (By taking over the ownership from those industrialists)

YearHow

many?who?

55 1 Imperial bank (SBI)

69 14 banks with >50 cr. deposits.

80 6banks 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:


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recommendation result?

Government / RBI mustnot

regulate the banks loan

interest rates. Banks should

be allowed to decide their

home loan, bike loan etc

rates by themselves.

RBI adopts BENCHMARK

PRIME LENDING RATE (BPLR)

=> nowadays Base rate system.

setup Debt recovery tribunals.

so loan defaulters cannot get

stay orders from courts, no

more Taarikh pe taarikh

DRT setup in 1993 =>

laterSARFAESI Act in 2002to

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 done

government should reduce its

shareholding from public

sector banks.

done, SBI shares sold, nowadays

government owns ~60%. (this

facilitates entry of professionals

in the board of directors)

Allow entry of private sector

banks and foreign banks.

done, leads to first round of bank

licences, explained below:

Bank licences: 1stRound (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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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

Bankmerged

withwhy?

Global

Trust

Bank

Oriental

bank of

Commerce

recall Ketan Parekh- he took money

from Madhupura cooperative Bank,

Abad and used it to run scam in

Sharemarket. Same Ketan had also

taken some money from Global Trust

bank also=> news stories =>junta

panics and runs to take out all money=>

business collapsed.

Bank of

Punjab

Centurion

bank

loss making. hardly any depositors and

loan takers, couldnt stand in

competition against SBI, ICICI, BoB etc.

Centurion

bankHDFC same as above

Times

BankHDFC 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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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 2ndround (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 3rdRound (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 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


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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. Anils 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 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

2013Bimal first meeting

February

2014Bimal submits report

March2014

Rajan fears Election commissions model code ofconduct, seeks their approval.

31stMarch EC gives approval


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2stAprilTwo winners announced. (Bandhan Microfinance and

IDFC)

Bandhan Microfinance and IDFC

Bandhan Microfinance IDFC (Infrastructure Developmentand 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


10/14


http://mrunal.org/2014/04/economy-new-bank-l icences-bandhan-idfc-bharatiya-mahila-bank-differential-bank-l icences-bimal-jalan-committee-narsimhan-c 10/14

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 Banks2. Payment Banks

New Private banks: Pro and Against arguments

Anti arguments Pro arguments

There is no need for

additional private banks,

existing banks sufficient.

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.
http://mrunal.org/2014/01/banking-nachiket-committee-payment-banks-rationale-features-advantages-limitations-pre-paid-instrument-providers-ppi-ussd-banking.html#68http://mrunal.org/2014/01/banking-shadow-banks-wholesale-banks-securitization-functions-features-nachiket-committees-recommendations.html#287


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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 financialinclusion!

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 banklicencee, 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 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.

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.

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.

These two small players

cannot even afford to They dont need to open ATMs


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launch all India ATM

network, forget about

opening branch offices.

anyways, because of the White label

ATM scheme.

RBI should gave given

licences to more

applicants, like they did

in the 90s (ten licences).

In the early 90s, all nationalized banks

were heading towards #EPICFAIL, so

to correct the course, RBI had to get inmore players to breed competition.

Same is not the case today- two new

banks are good enough. If Rajan gave

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

already bleeding

because of the heavy

marketing and teaser

rates offered by Private

banks. Two more such

banks will increase the

misery of the publicsector banks.

In the end, Business is all about the

survival of the fittest. Public sector

banks and their trade unions should

learn to perform or perish. Customer

deserves better services. Just to

make life easier for sarkaari banks,

we must not prevent the entry of

private sector.

Rajans American

ideas of free market,

wholesale banks,

differential licenses etc.

will ruin Indian banking

sector and Economy.

What works in USA

need not automatically

work in India as well.

This will lead to

subprime crisis like

disaster.

Just two new banks cannot create

Subprime crisis. RBI is much more

vigilant and strict than their American

counter part US feds. It is wrong to

assume that Rajan comes from

America so he is automatically an evil

capitalist, and all the hushiyaari

(smartness) is with Newspaper

columnists in The***** only.

More pro-con arguments can be added, post them in comments below!

Bharatiya Mahila Bank (2013)


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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 thatsseparate 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 desibanks 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.)


14/14


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%

Visit Mrunal.org/EconomyFor more on Money, Banking, Finance, Taxation and Economy.
http://mrunal.org/Economy

Documents

New Bank Licences_ Ready Revision Note for IBPS & UPSC