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[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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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.
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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
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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.
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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.)
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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%
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