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Firms wary of basic banking licence model

February 28, 2011 08:30 IST
The finance ministry's plan to offer basic banking licences may find few takers because of doubts over the commercial viability of the proposed business model.

The Economic Survey released on Friday had proposed two types of licences to set up banks in India: One for basic banking activities and another for full-fledged banking.

It said non-banking financial companies (NBFCs) and microfinance institutions should be considered for basic banking licences. This, the Economic Survey stated, would help in financial inclusion.

However, prospective entrants have given such a proposal the thumbs down, as they want full-fledged banking licences. Reserve Bank of India (RBI) is formulating draft guidelines for the entry of new players in the banking sector, which are expected to be published shortly.

"Banking is a long-term business. Naturally, we will like to be present in all areas. Rural banking is necessary. But one has to evaluate if only rural banking is commercially viable," said Y M Deosthalee, chairman & managing director of L&T Finance, who is also whole-time director and chief financial officer of Larsen & Toubro. L&T Finance, which is engineering giant Larsen & Toubro's NBFC, hopes to set up a bank.

The Economic Survey did not elaborate on the functions of basic banking, but had stated these should be clearly defined. This lack of clarity has also raised doubts among some companies, which say there is no need to create a separate structure for basic services.

"I do not subscribe to this idea. NBFCs already provide basic banking functions. So, there is no need for a separate structure. It will only add to the confusion," said Hemant Kanoria, chairman & managing director of SREI Infrastructure Finance. He said SREI will review its decision on a banking foray once RBI releases draft guidelines on new bank licences.

The experience of regional rural banks and local area banks, which proved unviable, also weighs on the minds of some who wish to set up a bank. Among them is the Shriram Group, which has evinced interest in applying for a banking licence through one of its subsidiaries.

"Corporate houses will not be interested in rural banking only, as experience shows that regional rural banks have not been successful as a business model," said Arun Duggal, chairman of the board of directors at Shriram Capital and Shriram Transport Finance Company.

RBI had released the gist of industry feedback to its discussion paper on new bank licensing norms. The central bank had observed that companies expect financial inclusion to be market driven, and not mandated.

"The objective of providing new banking licences should be clear -- whether it is lack of competition or financial inclusion. Once the objective is clear, those willing to meet it will apply," Duggal added.

Another major corporate house, the Aditya Birla group, said it will await clarity from the central bank on the issue. "I really don't know the difference (between the two types of licences proposed). So, it is too early to talk about it. We will wait for more clarity on this issue," said Ajay Srinivasan, business head for financial services at Aditya Birla Nuvo.

Somasroy Chakraborty & Niladri Bhattacharya
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