The last few years have seen a spate of alternative banking channels replacing traditional brick and mortar structures, thereby reducing branch dependency and lowering fixed costs and overheads. IT innovation in the banking sector has resulted in automated transaction processing, streamlined operations, and fewer errors on account of minimal human intervention. Also, with focused and seamlessly integrated multi-channel support, banks today aim for improved customer service and enhanced productivity and profitability. They also strive for financial inclusion, introducing Smart cards supported by POS devices and online/offline connectivity. Collaborative models with telecom companies, such as Airtel – for Airtel Money –are opening up new vistas.

Adding a new branch to a bank’s network is an expensive proposition requiring a great deal of thought and analysis. This paper provides a deep dive analysis on the

Reserve bank of India (RBI) licensing policy for new Banks and its impact.

RBI: New banking licenses policy in India – A perspective

WhITe PAPeR

2 | Infosys

Rural scenario

Figures from the 2011 census indicate

that out of 1.21 billion Indians, 833 million

live in villages and 377 million in cities;

rural areas account for nearly 70% of the

total population. Occupation in these

areas include agriculture, dairy farming,

small cottage industries etc. A study by

PricewaterhouseCoopers observes that

this section of the Indian population is

largely unbanked and that it is essential to

leverage technology to reach it. According

to facts and figures thrown up by this

study, only 37% of Scheduled Commercial

Bank branches operate in rural areas

with a dismal 40% of the population

holding bank accounts. Statistics also

indicate that banking reaches only 37%

Public Sector, Private and Foreign Banks

while semi-urban areas are served by the

Public Sector and Rural Regional Banks

(RRB) in addition to Co-operative Banks.

Banking presence is minimal in rural areas

with a few Co-operative Banks and RRBs.

There are still unbanked areas in the

rural segment.

of the population while mobile phone

penetration is higher at 50%. There is 1

bank branch and ATM for every 10,000

people .On the other hand, penetration of

mobile phones is 5100 per 10,000.

Some more figures from a World Bank

study depicting the average population

holding accounts with formal

financial institutions:

Going by RBI statistics, the banking

business is primarily concentrated in the

metropolitan region.

• Greater Mumbai (population 12.5

million) alone accounted for 22% of

total deposits and 25% of total credit in

FY 2010-11.

• The top six centres namely, Greater

Mumbai, Delhi, Chennai, Kolkatta,

Bangalore and hyderabad together

accounted for 46% of total deposits and

56% of total credit in 2010-11.

• A geographical distribution showed

that 1/3 of the total credit as of March

2011 was from the western region.

• A population-wise distribution indicated

that of the total credit as of March 2011,

68% was from the metropolitan region,

9% from semi-urban areas, and 6% from

rural areas.

Deposits

According to data from the McKinsey

Survey, “India Banking Overview”, from

2006 onward, 60% of all savings deposits

belong to 27% of the urban population – a

stark indication of the need for financial

inclusion in rural India.

Only about 47% of the total savings is

accessed by the financial sector (2005),

which means that a majority is outside

the banking channel for want of banking

reach and/or confidence. This is a major

contributor to “black money” in the

financial system.

The tendency in rural and semi-urban

areas is to hoard cash, gold, silver etc. at

home, increasing the risk of theft. Also,

idle money leads to loss of income for

an individual and adversely impacts the

country’s economic growth, resulting in a

vicious cycle.

Bank / Financial Institutions in India

• All India Financial Institutions(AIFIs)

• State Financial Institutions (SFCs)• State Industrial Development

Corporations (SIDCs)

• Public Sector• Private Sector• Foreign• Co-operative Institutions

• Urban Co-operative• State Co-operative• Central Co-operative

Commercial

Banks

Financial

Institutions

Capital Market

Intermediaries

Nonbanking

Financial

Institutions

(NBFCs)

India’s banking ecosystem is constituted

by different Banks/Financial institutions

catering to the needs of different industry

and consumer segments. The banking

industry of the country controlled by

Reserve Bank of India, NABARD and

other regulators had contributed to the

economic growth of the country

While analyzing the concentration of Banks

in India, the urban areas are dominated by

Present banking structure

Worldwide

Developing Economies

India

50%

41%

35%

Region Percentage (Approx.)

Low

Investments

Low Capital

Formation

Low

Income

Low

Savings

The last few years have seen a spate of

alternative banking channels replacing

traditional brick and mortar structures,

thereby reducing branch dependency

and lowering fixed costs and overheads.

IT innovation in the banking sector

has resulted in automated transaction

processing, streamlined operations,

and fewer errors on account of minimal

human intervention.

4 | Infosys

Despite the bleak outlook, the contribution

of our banking sector to GDP has been

in line with other developed countries

(data 2005).

China

USA

India

UK

Malaysia

Thailand

6.5

5.3

5.1

4.8

2.6

2.5

With drastic, far-reaching reforms coupled

with technological support, banking

facilities can be extended to encompass

all rural areas. This way, savings within

the rural community can be channelized

into mainstream banking. however, the

banking sector also needs to conform

to priority sector lending targets while

maintaining credit quality.

Cost of Intermediation (i.e. Spread)

(Source: McKinsey Survey Statistics of 2005)Remarks

Very high as compared to developed and

other developing countries5.1

4.0

3.4

2.9

2.4

India

Thailand

China

USA

Singapore

A brief analysis of the above :

• Ample scope for penetration of Banking

in the Tier 2 & other centres in India

• Vast potential to bring a major chunk

of the population under the organized

banking sector

• extension of channel Banking to the

rural areas

• Cost of intermediation can undergo a

substantial reduction due to increased

penetration & economies of scale

As part of RBI measures to take banking to

rural areas, the financial inclusion model

was commissioned almost 2 decades

ago. however the RBI has come to realise

that Business Correspondents (BCs) alone

cannot drive financial inclusion and that

rural customers need the confidence and

reassuarance of a bank branch. Certain

measures need to be taken to:

• educate the rural public on the benefits

of holding bank accounts.

• Build confidence in the safety of the

banking system.

• ensure unhindered banking services

inspite of infrastructural hurdles and

limited skilled manpower in such areas.

Loans/Advances

The rural population is by and large

unaware of the subsidies extended by

the Government of India. When in need

of funds or in the event of losses due to

drought, floods etc., indigenous farmers

do not receive timely help from banks

or insurance companies. They are at the

mercy of moneylenders or zamindars

who charge usurious interest rates and

demand excessive collateral, which adds

to their burden. They are also ignorant of

Remittances

Financial inclusion in a vast and diverse

country like India must be a collaborative

effort between Government bodies, the RBI

and industrial houses.

Steps taken to provide banking services to rural masses

Financial Inclusion

Mandatory opening of 25% of the new

commercial bank branches in unbanked

rural areas and simplified KYC norms for

account opening by rural customers,

are some of the steps towards financial

inclusion. The BC (Business Correspondent)

model has not met with great success, as

BCs are not always conversant in banking

technology, or well versed in products

and processes.

Bank led telco model

Limited in its scope, the main objective of this model is to facilitate trade and commerce through secure, convenient funds transfer; accordingly, it does not support basic banking functions like deposits, lending etc. Some of the payments made possible through this model include:

• Utilities (bill payment and recharge of mobile phones and digital TV, electricity, gas etc.)

• Ticket purchases through travel portals

• Movie ticket purchases

• Shopping at restaurants, shops etc.

• Payments for other products and services such as subscriptions, donations, insurance premiums etc.

• Money transfer (either to the bank account or wallet of a customer using the services of the Telco operator)

the minimum support prices offered by the

Government and therefore end up selling

their produce at rock bottom prices.

Credit appraisal for Kisan credit cards

and term loans are subjective and

depend on the nature of seasonal crops

and soil, rainfall prediction, weather/

climatic changes, availability of water etc.

Ascertaining the actual needs and verifying

credentials of individuals requires the

presence of bank branches.

5 | Infosys

Enhancement of rural penetration

Issuance of licenses on the condition

that the bank will open at least 25% of

its branches in rural areas is a good way

to strengthen banking services in those

places. Use of technology and modern

infrastructural facilities in addition to core

banking solutions and various delivery

channels will help improve customer

Future mergers and acquisitions

According to the RBI, as compared to other

emerging economies, the net interest

margin of the Indian banking sector

remains higher, increasing the burden

on consumers. It is anticipated that the

entry of new players may pave the way for

innovation, and better services at reduced

costs, contributing to the country’s

economic growth.

According to e&Y, Global Banking

Outlook – 2012, “Reforms which allow

non-financial companies to establish

banks and the deregulation of deposit

interest rates, will also help by increasing

domestic competition in banking over

the medium to long term scenario.

however further reforms are needed to

facilitate infrastructure development and

encourage much higher levels of corporate

investment. The potential of the Indian

market makes it extremely attractive

for international banks but given the

challenges that remain, the benefits of

investments may only be realized over a

long period.”

Given the country’s population of over 1.21

billion, there is ample scope for entry of

new banks. Due precaution taken by the

RBI before giving New Banking Licenses

(NBL) can avert an M&A situation.

Potential misuse of low-cost funds by

industrial houses with banking licenses

The RBI has in place ample checks to

restrict fund diversion by industrial houses

with bank licenses. The legal structure of all

financial services entities of the promoter,

board composition, financial sector

experience of the top management, voting

rights, shareholding restrictions, maximum

cap on FDI/NRI/FII holdings, transparency

in source of equity, realistic and viable

business plans are some of the key aspects

that the RBI would be looking into.

Mandatory listing of new banks within

three years as proposed by RBI draft

guidelines will ensure that they are under

Issue of New Banking licences by the RBI

Deposits Base

(INR Billion) 2,467.06 2,555.12 2,201.04 3,795.88 10,436.47

Advances Base

(INR Billion) 1,954.20 2,537.28 ... 1,697.60 2,937.75 8,675.79

Net Interest

Margin 4.22% 2.73% 3.59% 3.84 3.85%

Branches 2,544 2,752 1,622 (including

9 extension

counters)

Population

group wise

branches

Metro 451

Urban 488

Semi-

Urban 515

Rural 150

ATM 8,913 9,006 9,924 6,009 22,141 – for SBI

27,143 (incl. 5

subsidiaries)

Gross NPA

(Net NPA)

ROA 1.77% 1.50% 1.68% 1.19% 0.88%

EPS 22.1 56.11 102.94 154.02 184.31

Net Interest

Income

(INR Billion) 122.97 107.34 80.18 134.14 432.91

Cost to Income

Ratio 42.91% 44.70% 39.75% 45.23%

Profit After

Tax (INR Billion) 51.67 64.65 42.42 48.84 117.07

Human

Resources 66,076 58,276

5,658 Domestic –

14,097

Foreign

Branch Offices

– 173

Population Population

group wise group wise

branches branches

Metro 927 Metro 2,218

Urban 1,216 Urban 2,502

Semi- Semi-

Urban 1,324 Urban 3,995

Rural 2,191 Rural 5,382

1.00% 0.62 (0.25%) 2.93 % (1.52%) 4.44% (1.82%)

(0.18%)

HDFC Bank ICICI Bank Axis PNB SBI

Statistics: F.Y. 2012

Financial Inclusion – progress so far

Number of “No Frill Accounts”

Out of the above, dormant accounts

Number of BCs serving Financial Inclusion as per latest data

103 Million

75%

Over 1,10,000

service. While healthy competition among

banks can be good for the customer in

terms of products and services, it can prove

counterproductive for banks, making some

branches unviable.

The following is a data snapshot for some

top-ranked public and private sector

banks for a better insight into the Indian

banking scene:

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Reghunathan Sukumara PillaiIndustry Principal, Finacle, Infosys

Bhawani Shankar Malpani

the purview of both the RBI and SeBI

(Security and exchanges Board of India) for

that duration.

The promoter or holding company should

contribute a minimum of 40% of the

total equity, to be locked in for five years.

New banks will also have to maintain a

minimum Capital Adequacy Ratio (CAR) of

13% for the first three years.

Feedback from various agencies such

as the Income Tax Department and

enforcement Directorate is required before

sanctioning licenses.

In addition, checks through core

banking solution implementation and

disciplinary and penal action in case of

breach of conditions will go a long way in

safeguarding public interest.

For effective procedural implementation

of new license issuance, the RBI intends to

appoint a high-level advisory committee

comprising individuals with vast

experience in the banking and financial

services sector, who in turn will ensure that

licenses are given to industrial houses with

valid credentials and the right motives.

The emphasis here would be on the profile

of the aspirants and their background,

ensuring that their business culture is

aligned to that of a bank; that they carry

sound credentials; and hold an impressive

track record in their line of business.

Besides, these new banks would need

to list within three years and the banks’

boards should have independent directors.

Furthermore, the RBI has sought powers

to dissolve banks in the event of severe

violations, thereby putting public interest

above all else.

New banks, with large corporate houses

at their helm, will bring to the table

their vast expertise and infuse freshness

and innovation into this sector, while

complying with the RBI norms.

In a nutshell, collective, mass banking is

the way forward for the larger good. Banks,

software and technology sectors, services

industry comprising auditing firms, trade

and commerce at large and the general

public, all stand to gain from this. Increased

deposits and credit growth in addition to

availability of low-cost funds would have a

positive impact on the country’s economy.

Conclusion

entrepreneurship is needed so as to

innovate new ways of banking wherein

banking services can be provided in an

innovative manner. This is quite possible

with the involvement of big industrial

houses as they have the requisite financial

muscle and they can get the requisite talent

as may be required. Lately, Government

of India and RBI have also realised the

same and steps have been initiated in that

direction by way of bringing NBL.

Network, Infrastructure and safety are the

crucial issues in rural areas, and preparation

by the banking sector to cope up the same

has to be ensured in parallel.

For the economic growth of the country

in the next decade, the banking sector has

to reach the unbanked and rural masses.

Credit growth in the rural areas coupled

with technology can only be provided by

the Banking sector, Banks can replace the

private lenders who are exploiting the rural

population for a longer period by way of

huge interest and charges. RBI and the new

banks have to create awareness in the rural

public and ensure the credit is reaching

the needy. With proper enforcement of

rural measures for economic growth by the

regulator, the new licensing of banks can

pave the way for future economic growth

in the country.

References 1. articles.economictimes.indiatimes.

com/2011-07-15/news/29777954_1_

rural-areas-urban-areas-census-report

2. thecalibre.in/in-depth-current-affairs/

rbi-sets-up-panel-on-financial-

inclusion/102012/?p=1750

3. www.rbi.org.in/scripts/AnnualReport

Publications.aspx?Id=1038

4 www.marketwatch.com/story/

china-construction-bank-profit-beats-

forecasts-2012-10-28

5. http://www.mckinsey.com/

6. Website of respective banks, Indian

Banking Association, RBI, database and

multiple reports along with RBI Report

on Trend and Progress of Banking in

India 2010-11

7. Times News Network

8. The economic Times