Hence, the rush to apply for bank licences when the window of opportunity opened earlier this year after a decade. Corporations, gold loan companies, financial services conglomerates, real estate tycoons, grassroots activists and quasi-public sector organisations, all created war rooms to meet the stiff deadline of July 1. After some confusion, one post-facto addition and two withdrawals, 25 applicants stay in the fray. Against the backdrop of the withdrawal of the application by Tata Sons and as the promised delivery date for the first in-principle approvals approaches at the turn of the calendar, the following questions are likely to play on the minds of applicants.
Is this the right time to enter the market? Between the idea of granting new bank licences and the execution of the idea, much has changed. The banking sector is struggling with large non-performing assets as the economy faces headwinds. Part of the reason for the attractiveness of banking as a business has been the scarcity value of bank licences and the fact that granting bank licences is a once-in-a decade type of event. With the positive buzz around "on-tap" or more frequent licensing, that uncertainty goes and applicants can time their entry based on market dynamics rather than the opportunity window.
Is this the right type of bank to build? The guidelines for licensing new banks has laid out in detail the type of bank that applicants are required to build. Everything from urban to rural branch ratio, technology, governance, holding structure, listing timeframe is prescribed either in generic or specific terms. The leeway to create a differentiated model is very limited owing to this as well as the lack of flexibility on liability side distribution.
Desirable as it may sound on parameters of inclusion and safety, this model is untested as no bank in India has actually operated with the prescribed branch ratio from inception and almost no bank stands to the test of the rural urban ratio as of now. Some applicants may actually be able to come up with game-changing ideas for viable inclusive banking. Others may want to create their niche in other segments. Differentiated licensing, when it happens, may provide a better fit between the aspirations and expertise of promoter institutions and the business models of their banks.
Is my bank going to be held to standards different from banks licensed in the past or to be licensed in future? The timing of the licence seems to be an important success factor in Indian banking. We have old private sector banks, new private sector banks and the proposed new private sector banks, each regulated within their own set of rules and fitted within their own peer group. If licensing norms are indeed changed in view of a better appreciation of differentiated business models, will the current applicants still be held to the standards they have proposed under the business plans in 2013?
Is the cost structure viable? The idea for granting additional bank licences was started in times of high growth and optimistic growth projections. Already, between 2010 and 2013, business plans had to be revised with the downward growth forecast. With delay and implementation lags, the costs may go up further. Many of the applicants have successful, profitable non-bank finance businesses that are required to be wound up before the bank becomes operational. Although the long-term outlook on Indian banking continues to be positive, this income volatility in times of uncertain growth can be uncomfortable.
Is my organisation exposed to needless public scrutiny? One good thing we have so far is the high level of trust in the institutional integrity of the Reserve Bank of India (RBI). The necessity to maintain that trust has led to a detailed and transparent process, where key developments are shared by the RBI like never before. In the days of aggressive media and relentless public scrutiny, this itself can cause concerns. In addition, the timing of new bank licenses and the next general election may appear too close for comfort.
The guidelines for new bank licensing unequivocally require applicants to think of building inclusive businesses, profitably. The juxtaposition of the two objectives is not to be undermined. All the noise from bank unions and sundry political interests around "profiteering" banks distracts from the fact that banks are required to be run with fiscal prudence and return interest to depositors and dividend to shareholders.
On the other hand, globally, banking has been challenged to live up to a more inclusive image. While the "clubby" model falters, there are many experiments underway to support small businesses. Hopefully, against that backdrop, there will be a convergence of the business plans of a few applicants and the selection criteria; because there is no underestimating the importance of new entrants to energise the competitive landscape of Indian banking.
The writer is Leader, Banking & Capital Markets, PricewaterhouseCoopers India. These views are personal