Project on BANKING LICENSE

What is Banking License

Individuals or companies that wish to open a bank and offer financial services are required to obtain a banking license. The Process of obtaining a license is offen complex therefore it is advised to seek the assistance of professional consultancy firm.

Govt. & RBI Stand

RBI likely to issue new bank license guidelines in February 2013. Large corporate houses like Reliance group, Religare, Shriram groups, Larsen & Toubro group and Aditya Birla group are interested in entering banking business. Noted economist and Nobel laureate Joseph Stiglitz said corporates should not be allowed to enter banking space as it has the potential to create conflict of interests. We expect that four to five licences will be granted, Finance Minister P. Chidambaram The RBI had issued draft guidelines in August 2011 for issuance of new banking licences, while in July 2012 it released the comments and suggestions received by it.

Impact if license is issued

As more players enter the banking space, intense competition among the banks might benefit the consumers. Banks will focus on reducing their operational cost which in turn will result in charging lower interest rates to consumer in the long run. If NBCFs are given the preference to run a bank, then rural and semi-urban consumers will be most benefitted.

As NBFCs cannot take demand deposits, their cost of funds are high as compared to banks. When banking license will be awarded to NBFCs, their cost of deposit will be substantially reduced the benefit of which may trickle down to the customers in semi-urban and rural areas.
More strategic tie ups can be seen with micro-finance institutions which may help to broaden the reach of banking in several villages.

Advantages
The Reserve Bank of India has been hawkish on banks for not adhering to its directives of opening of no-frills, zero-balance accounts in rural regions. It says majority of the population specially the semi-urban and rural mass are not getting access to various financial services availed by people residing in urban areas. Non-banking financial companies (NBFCs) can be granted banking license as it is already regulated by RBI and hence the fit and proper concerns can be addressed easily.

On the flip side, their ability to run a bank is questionable as these institutions will now have to face stricter guidelines and norms of a bank if granted a banking license. NBFCs are allowed to work on a lighter regulatory framework as compared to banks.

Disadvantages
The RBI is skeptical about granting banking license to industrial houses as the negatives by far outweigh the positives. Though the industrial houses can be a source of capital and provide the adequate expertise in running a bank, these houses might create conflict of interest through dealing with its own group companies neglecting the other clients. This may serious dent the purpose of allowing new banks by RBI. The Central bank also adds that any industrial house involved in real estate should not be allowed to run a bank. RBI has also opened up a debate on what should be the capital requirements to ensure only those entities serious about participating in financial inclusion plan gets the license.

Hence, it has proposed that the capital requirement should be in the range of 300 crore to Rs 1,000 crore ( 3 billion to 10 billion). However, setting a low capital requirement will allow companies with limited ability to invest in technology to enter banking sector.

Financial Inclusion
Inclusive financing is the delivery of financial services, at affordable costs, to sections of disadvantaged and low income segments of society. Opening of no-frills accounts (Very Low Minimum Balance) Relaxation on know-your-customer (KYC) norms (Evidence as to Identity of customer sat.) Simplified branch authorization (To address the issue of uneven spread of bank branches)

Opening of branches in unbanked rural centres

NEWS
Yashwant Sinha Says no to Bank Licenses to corporate Co-operative credit societies will have to seek banking License from RBI Reserve Bank Cancels the license of Ghaziabad Urban Co-operative Bank Ltd. (UP). Banks Provisioning to go up by Rs. 150 bn in 3 years. 3 NBFCs Likely to get RBI nod for Banking License (L&T Fianace Holding, Sriram Group and Mahindra and Mahindra Fianacial Service.