NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, April 4, 2014

More than four years after the then Finance Minister Pranab Mukherjee announced the government’s intention to issue more banking licences, this has indeed been done. In 2010, there was much fervour about financial inclusion and, against that backdrop, new banks were seen as an important means of boosting capacity and penetration of financial services. It was also argued that the inclusion strategies of potential licensees were going to be given significant weight in the final decision. In the build-up that followed, the desirability of issuing licences to corporate houses and brokerage firms was much debated. In the event, both these groups were deemed to be eligible for applying, which, not surprisingly, raised expectations that at least some of them would be approved.

But the issue of two licences out of an applicant pool of 25 suggests a more cautious – and welcome – approach. It is evident that the Reserve Bank of India (RBI) has stood its ground and refused to allow business houses to get into banking, in spite of the obvious pressure from the government. In the event, it has prevented regulatory capture, which would have been a danger if the big business houses had got into banking. Equally welcome is the RBI’s move to keep the door open for India Post to qualify as a bank licence recipient in the coming months, and to make the issue of bank licences a more frequent affair by opting for an on-tap mechanism for granting licences in the future.