New banking license announcement is first major reform in

Two decades

NBFCs and the private sector can now enter the banking business if they meet RBI’s criteria.
This is a major move for the financial sector

Private players and non-banking finance companies (NBFCs) have reason to cheer the
Budget speech as the finance minister announced that the RBI is open to giving them
banking licences if they meet the apex bank’s criteria.

“The RBI is considering new bank licences to promoters in the private sector and also
NBFCs, if they meet the eligibility criteria of the RBI,” Pranab Mukherjee said while
presenting the annual Budget for 2010-11 in the Lok Sabha.

NBFCs like Indiabulls, Reliance Capital, Religare, IL&FS, IDFC and Aditya Birla Financial
Services are likely to apply for bank licences after the RBI norms are in place.

“The Aditya Birla Financial Services Group is already a large non-bank player occupying a
significant position across all its verticals. We wholeheartedly welcome this initiative and
will definitely apply for a licence. The Aditya Birla Group is confident that we will meet any
eligibility criteria that might be set," said Ajay Srinivasan, chief executive (financial
services), Aditya Birla Group.

“The finance minister has shared the government's desire to open up the banking sector to
NBFCs and the private sector. This is a significant step towards further strengthening and
broadening the banking sector and bringing it closer to the aam aadmi,” adds Mr Srinivasan

No new banks have been set up in the past eight years. In fact, no new Indian bank has been
set up since the first flush of liberalisation in 1993 when half-a-dozen banking licences were
given. This announcement clearly demonstrates the government’s plans for liberalisation of
the financial sector.

India has 96 scheduled commercial banks (SCBs)—27 public sector banks 31 private banks
and 38 foreign banks—having a combined network of over 53,000 branches. According to a
report by ICRA, public sector banks hold over 75% of the total assets of the banking
industry, with the private and foreign banks holding 18.2% and 6.5%, respectively.

Unlike banks, all NBFCs cannot accept demand deposits. Only NBFCs which hold a valid
certificate of registration with authorisation to accept public deposits can do so. NBFCs that
were earlier allowed to be converted into banks were Kotak Mahindra Finance and 20th
Century Finance. While Kotak has diversified into various financial services, 20th Century
became Centurion Bank; it was taken over by a bunch of private equity investors and
eventually merged with HDFC Bank. Two of the other new licensees in the early 1990s—
HDFC Bank and UTI Bank (renamed Axis Bank)—have become very successful private
 banks.
The announcement also cheered the markets. The Sensex gained 175.35 points while the
Nifty gained 62.55 points. Religare (an NBFC) inched up 3% to Rs371 from Rs361,
Indiabulls shed 1% to close at Rs98.90, and Aditya Birla Nuvo gained 4% to end at Rs842.

Licenses for new banks under RBI guidelines: FM

Finance minister Pranab Mukherjee Saturday said licenses for opening new banks would be
issued under the norms and criteria laid down by the Reserve Bank of India.

"We have assured RBI that government borrowings will not affect access to private credit,"
he said at a function organised by the RBI, adding that the process of consolidating
government-run regional rural banks was underway.

The finance minister, in the budget for 2010-11 he presented last week, had announced that
the RBI was open to giving banking licenses to private players and non-banking finance
companies (NBFCs) if they met the central bank's criteria.

No new banks have been set up in the past eight years. In fact, no new Indian bank has been
set up since the first flush of liberalisation when half-a-dozen banking licenses were given in
1993.

India has 96 scheduled commercial banks, 27 public sector banks, 31 private banks and 38
foreign banks, with a combined network of over 53,000 branches.

According to a government report, public sector banks hold over 75 percent of the total
assets of the banking industry, while private and foreign banks hold 18.2 and 6.5 percent
respectively.

India's central bank starts process for new bank licenses

The Reserve Bank of India (RBI) Tuesday began the preparatory process to issue new
commercial banking licenses to private sector players as suggested by Finance Minister
Pranab Mukherjee in his budget speech for this financial year.

RBI Governor D. Subbarao said a discussion paper will be prepared by the central bank and
put up on its website by the end of July for wider comments and feedback.
"Thereafter, detailed discussions will be held with all stakeholders on the discussion paper
and guidelines will be finalised based on the feedback," Subbarao told chief executives of
commercial banks while unveiling the annual monetary policy here.
"All applications received in this regard would be referred to an external expert group for
examination and recommendations to the Reserve Bank for granting licenses," he said.

A host of Indian corporate houses, including the Reliance Anil Dhirubhai Ambani Group, the
Tatas and the Aditya Birla Group, as also non-banking finance companies like Muthoot
Pappachan Group and Srei Finance are keen to enter the commercial banking industry.