On your marks, get set ...

A week prior to the announcement of the Union Budget, Reserve Bank of India (RBI) has come out with the final guidelines for issuing new bank licences and set the deadline for submission of applications at July 1, 2013. Three years ago, the then finance minister Pranab Mukherjee, had first announced the government's intention to bring new banks into the fold. Since then, RBI not only kept alive an engaging debate on the topic but also ensured that the government put in place an enabling legislation for the apex bank to issue new bank licences.

The field has been thrown wide open to corporates, non-banking financial companies (NBFCs), as well as public sector players to apply for new licences. However, the regulator's aversion to 'asset-price sensitive sector' and 'a misaligned culture' will ensure that only the appropriate are licenced. By keeping the eligibility criteria liberal, albeit with a judicious set of continuing supervisory conditions, the regulator has struck a very fine balance between transparency and prudence. This will ensure that only the appropriate continue to be licenced. While there is little doubt that all aspirants will have a level playing field, due consideration should be given to imminent capital needs of existing public sector banks while deciding on applications made by public sector entities.

That financial inclusion remains at the heart of the new guidelines, is hardly a surprise. New players are required to open at least 25 per cent of the branches in unbanked rural areas with population of less than 10,000, in addition to complying with existing priority sector norms. New banks will also be expected to run on "core banking solutions" and have all modern infrastructural facilities from the outset. The applicants not only need to clearly demonstrate how their business plan is viable and credible but also need to put forth 'out of the box' thinking to deliver low-cost financial access and strategies to operate in other competitive market segments.

RBI has given due importance to corporate governance standards to prevent apparent conflict of interest between ownership and management, arising out of corporate houses entering the banking sector. The composition of the board with a majority of independent directors, no equity or debt exposure to the promoter or their group, and setting up of the bank only through a non-operative financial holding company aims to ring-fence the bank from the promoter group and enable appropriate supervision.

RBI's 'fit and proper' criteria, although subjective, is clear in intent. The regulator has once again reiterated the importance of sound credentials and integrity, strong track record of financial soundness as well as demonstrated ability of successfully running businesses as a precursor to entry into the banking sector.

The initial capital requirement of Rs 500 crore, with a lock-in of five years, seems reasonable and should allow a number of players to apply. The norms around pre-approval from RBI for further infusion of capital will make sure only the "fit and proper" continue to remain in the business.

Unlike as previously thought that this will be a continuing process, the July 2013 timeline indicates a one-off window for issuing new licences. I would expect that with this experience, the guidelines may be changed to a continuing process in the future. Indian banking could do with greater competition, especially if it leads to improvement of customer services and enhancing the reach of banking services to all parts of India.

The last few years have probably taught the global banking industry more than the entire history of formal banking. I am confident the new applicants will carefully analyse the emerging models in banking globally, particularly around operational efficiency and customer servicing and indigenise these in consonance with local needs.

(The author is Partner, SR Batliboi & Co. The views expressed are personal)