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Differentiated Bank Licence

Recently RBI granted full servicing bank license (Commercial bank license) to IDFC and micro-lender Bandhan Financial Services. RBI had received 26 applications for banking license, however RBI granted only two of them (license). Jalan committee, which scrutinized these applications, recommended that some of the applicants may be better of applying for a differentiated license rather than for full license. Earlier RBI governor has stated that, opening a window for differentiated bank licenses and on-tap license is under consideration. RBI suggested other applicants (who did not get banking license) to apply fresh once RBI comes up with the new guidelines regarding differentiated bank licenses and on-tap licenses.

What is differentiated bank license?

A differentiated license will allow a bank to offer only selected financial products or focus only on certain banking service.

For example,

  • A payment bank like Mastercard or VISA, which only deals with payment and do not deal with deposits and lending.
  • Rural bank focusing on agriculture loan to farmers.

In the economy, different sectors have different finance and banking service requirement. And for any generalised commercial bank to offer its services to these various sector effectively will become cumbersome.However, if it is focusing on specific banking service, say financing infrastructure projects or providing credit card service, then over the period they will offer efficient and suitable service as needed by customers.

While examining applications for banking license RBI realised that many of the applicants have acquired expertise on some banking services, which can be further developed and strengthened with differentiated bank license. Incidentally, India has different kinds of financial and banking institutions.

They are listed as follows –

  • Full service commercial Banks: In India, 75% of the assets is controlled by the public sector, about 18% by private sector and the rest by foreign banks. For example: SBI, bank offers various products like savings a/c, housing loan, infrastructure project loans etc.
  • Regional Rural Banks: Cater the needs in rural areas.
  • Co-operative Banks: Varieties of co-operatives like urban, rural, district level banks have come up and serve the needs of local or community level.
  • Infrastructure Banks: IDFC was set up to fulfill the needs of infrastructure projects.
  • Other specialised lenders: EXIM bank – catering needs of import / export entities, SIDBI – Providing finance for small business, NABARD – Serving agriculture and other rural sectors.
  • Non-Bank finance companies: Provides bank like services but free from some of the obligations of Central bank like CRR and SLR.
  • Micro Finances Institution: Catering needs of that section which was left out from national banking network e.g. micro financing to Self Help Groups in rural areas.

A complex regulatory task

Issuing a differentiated bank license, will require RBI to frame different regulations based on the type of banking service provided by the entity. This also underlines the importance of understanding the requirements of the different sectors of the economy, like capital adequacy, CRR and SLR limits, regulatory audits, compliance etc.

A normal commercial licensed bank has an advantage of access to low cost deposits. Though these banks have to maintain a proportion of deposits as per RBI mandate in the form of SLR and CRR, they have an unlimited access to fund from central bank.

Hence, before issuing differentiated license, RBI have to settle issues related to PSL (Priority Sector Lending), SLR and CRR, and access to RBI funding (limits). As stated by Nachiket Mor in the report on financial inclusion, “India has significant experience of both national bank as well as the regional bank design”. RBI can build on this base; it has to be done without destabilizing existing banking system in the country.



 On-tap licensing

It means that the RBI window for granting banking licenses will be open throughout the year. In past 20 years, the RBI has licensed 12 banks in the private sector in 2 phases. Last new bank licenses were issued to Kotak Mahindra and Yes Bank in 2003-04. Hence to extend geographic coverage of banks and improve access to banking service, RBI is thinking of continual process of granting licenses i.e. on-tap licensing.



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