On-tap licences for small finance banks to see many applicants this year

You have a Rolls-Royce, a Bentley and a BMW in your garage. But feel only a banking licence will help you drive into El Dorado. The Reserve Bank of India’s (RBI’s) on-tap universal banking licence policy announced four years ago raised the hopes of many who entertained such thoughts; none were issued. It’s time to dream again: Mint Road is set to come out with “on-tap” licensing norms, albeit for small finance banks (SFBs) by end-August this year.

H P Singh, chairman and managing director of the Gurugram-based micro-finance institution (MFI), Satin Creditcare Networks is an aspirant. “We have 1,163 branches and a headcount of 11,831 across 22 states and union territories, serving 3.55 million clients. And, we have a strong presence throughout Uttar Pradesh, Bihar, the Northeast, and Madhya Pradesh. We are well positioned to be an SFB.” 

You also have UGRO Capital’s executive chairman Shachindra Nath, who has raised Rs 958 crore from a clutch of private equity firms and family-home offices. UGRO was not around when the first set of SFBs was licensed; there is nothing to suggest it will not rethink.

Then, you have some corporate houses with a strong connection with the hinterland. If there is hope that a good performance as an SFB will be the path towards a full-fledged banking licence down the line, it can’t be ruled out they will close this option. 

And for the record, there were 72 applications for SFBs in the first round; 10 were waved in.

The on-tap licensing of SFBs comes even as the banking regulator has not officially said it has closed the tap for universal banking licences. The shift towards SFBs is not sudden: Mint Road had made it clear in August 2015 that it intends to use the learning from the first round of licensing to revise the guidelines and move towards on-tap.

The new game

Says Ajay Kanwal, managing director of Jana SFB, “This model (of SFBs) is much better than issuing universal licences, which carry more risks.” You remind Kanwal of the experiments with local area banks in the late 1990s; and the licensing of payment banks, both of which did not fire in the way they were imagined. 

“I agree, but having been through all of them, I think it (RBI) feels SFB is the best option.” Both SFBs and payment banks (as models) may be seen as sandbox initiatives in a way – akin to Mint Road’s idea of allowing fintechs to test out innovative products and services.

The need for better financial inclusion is also a trigger — the performance of SFBs so far on priority sector loans was specifically mentioned by RBI Governor Shaktikanta Das while making a case for many more of these. 

RBI’s Trend and Progress of Banking in India (2017-18) report says FY18 was “a watershed in the evolution of India’s banking system”. First, the force multipliers are in place for inclusive lending – through co-origination of loans by banks and NBFCs in addition to trading of priority-sector lending certificates on the e-Kuber platform. Second, the drive for financial inclusion with the introduction of the modified Pradhan Mantri Jan Dhan Yojana. Other reasons for terming FY18 as a “watershed” were highlighted too, but the takeaway on financial inclusion was that partnerships are the way forward; digital platforms for outreach are out there, as well as the non-digital ones. This can be inferred from the central bank’s decision to also allow urban co-operative banks (UCBs) last year to morph into SFBs. 

And given that more SFBs are set to be licensed, it is clear that islands of banks created over the decades in the hope they will address a particular segment’s needs have not delivered. You have 16 state-run banks, 1,551 UCBs, 56 RRBs (with 21,747 branches no less), 21 private banks (both new and old), 10 SFBs, and 45 foreign banks with branches. Or 1,668 banks which straddle the entire financial pyramid; to service the well-heeled to the down at heel. 

Fresh throw of the dice

The term on-tap licences first reared its head with reference to universal licenses; but what explains zero issuances? 

“The RBI had not laid down any process for such licenses. Also, most entities, which had applied in the last round, did not get a formal feedback of non-acceptance of their applications,” says Abizer Diwanji, head-financial services at EY India. He feels that most aspirants (mainly large- to medium-sized NBFCs and professionals with proven track records) fear rejection without response and hence, they do not really want to send in an application unless they are sure of acceptance. “Many have, of late, opened a dialogue with the RBI to assess if the outcome of their discussions is likely to be positive,” he adds.

The lack of formal feedback from Mint Road will bother new applicants for SFBs as well — will it entertain as SFB hopefuls those who were not issued an “on-tap” universal banking licences? It’s not just aspirants who fear a run on the reputation — it holds true for Mint Road, too.

Ten banking licences were issued in 1993; two more in 2003. Of the first lot, five banks are still around — HDFC Bank, ICICI Bank, Axis Bank, IDBI Bank and IndusInd Bank; plus, an upgrade from a UCB – DCB Bank. From the second lot, we had Kotak Mahindra Bank and YES Bank. But what this survival rate of 58.33 per cent does not tell you are the governance issues faced at many of these banks over the years; and the RBI’s supervisory bandwidth consumed by them. But SFBs are a different game. Big corporate houses may well rethink the route to their banking ambitions, especially the ones that have well-placed linkages with the semi-urban and rural population. 

Who’s to say a Bajaj Finserv or an M&M Financial Services will not relook at their banking ambitions through a new SFB given their legacy linkages with the hinterland.

Can more SFBs do what all those which make up the numbers as on date couldn’t do by way of financial inclusion for 75 years after Independence? Is there is a higher thinking at work here? The answer to both is yes; just that in the case of the first, it will not happen in a jiffy, but the building blocks are being laid.

Who wants to a banker? Just about everybody one wants to tap!