mrunal new bank licences_ ready revision note for ibps & upsc

7/8/2014 Mrunal New Bank licences: Ready revision note for IBPS & UPSC

http://mrunal.org/2014/04/economy-new-bank-licences-bandhan-idfc-bharatiya-mahila-bank-differential-bank-licences-bimal-jalan-committee-narsimhan-commit… 1/13

[Economy] New Bank Licences: Bandhan, IDFC, Bharatiya Mahila Bank;Differential Bank licences, Bimal Jalan Committee, Narsimhan Committee;arguments favor against, Bank nationalization, Historic evolution of Bankingsector in India

1. Prologue

2. Banking sector in British India

3. Birth of RBI

4. Banking sector Post Independence

5. Narsimhan Committee I (1991)

6. Bank licences: 1st Round (1993)

7. Narsimhan Committee II (1998)

8. New Bank licences 2nd round (2001)

9. New Bank licences 3rd Round (2013-14)

1. Bandhan Microfinance and IDFC

2. In principle approval

3. What is Differential licenses?

4. New Private banks: Pro and Against arguments

10. Bharatiya Mahila Bank (2013)

1. How is it a Mahila Bank?

2. Business plan of Mahila Bank?

3. Why Mahila Bank is mere publicity stunt?

Prologue

important: SSC has uploaded halltickets for reexamintion of CGL-2013 to be held on27th April. Respective players check your regional SSC sites accordingly. now comingto the subject…

Bandhan and IDFC got new licences, you already know that. it’s just two line currentaffairs. but for SBI /UPSC interviews, we need to some background information forquestions like:

1. After Sahara Scam and NSEL crisis, why should we risk giving bank licences toprivate companies? In fact why not simply nationalize the existing private sectorbanks so they cannot do any scams!?

2. We already have large banks such as SBI, ICICI, BoB- all of them having pan-Indiapresence, capable of fulfilling the goal of financial inclusion, then why is there aneed to get new private sector banks?

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To answer such “Devil’s advocate” type interview questions, we need to go back inhistory:

Banking sector in British India

There were two types of banks

British Banks “Swadeshi” Banks

First, East India companyestablishes three Presidenciesin India- Bombay, Bengal andMadrasThree Presidency banks setupin those cities. Later mergedinto one Imperial bank(’21)=> SBI (’55)

Parallel to British banks, Indian banks alsosetup- Allahabad Bank, Punjab nationalbank (PNB), Bank of Baroda (BoB),Canara bank etc.

Their target audience = Britisharmy, civil servants and judges

Target audience= big merchants, particularlyraw-material exporters in Bombay and MadrasPresidency.

Overall, neither British Banks nor Swadeshi banks helped in the financial inclusion ofpoor people, they still had to rely on local money lenders and Zamindars.

Birth of RBI

By early 30s, there were >1200 banks in India!But all of them under Companies law- there was no banking regulation, no RBI, noSLR, CRR, repo rate, reverse repo rate etc. So the Civil service & BankPOaspirants of that era, were relatively “Stress free” compared to present generation.Problem starts with Great American depression (’29) => sharemarket andcompanies of US and Europe collapse= raw material import declines = desimerchants cannot repay loan EMIs = Indians banks starts collapsing one by one.therefore, British Indian government setups Reserve bank of India to superviseover these banks (’34)

Banking sector Post Independence



Click to Enlarge

from mid-50 onwards, there is gradual expansion of banking sector in IndiaSBI, ICICI, PNB, BoB all start opening more and more branches.but still target audience= merchants, urban (upper) middle class and industrialhousesBranches increased? YESRural penetration? NODid they help aid in Five year plans like giving cheap loans to farmers and micro-enterprises? NOAll these banks were in the hands of industralists. (who owned majorityshareholding => can vote majority of board of directors=> bank’s policy decisionwill only be made to suit those industrialists e.g. opening branches near factory-townships, giving loans @cheap rate for setting up new factories and so on….)

Nationalization

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Government gets impatient with ^all this.starts nationalizing banks (By taking over the ownership from those industrialists)

YearHowmany?

who?

’55 1 Imperial bank (SBI)

’69 14 banks with >50 cr. deposits.

’80 6banks with >200 cr. deposits (Andra, Vijaya, Oriental bank ofcommerce etc.)

Nationalization: more problems

1. In theory, nationalization =government becomes majority shareholding in thosebanks => government can pick board of director of her choice = bank takesdecisions to suit government’s Five year plan requirements= everyone’s happy,right? nope

2. In reality, nationalization =created more problem than it solved. for example3. Now all the board members = politicians, their relatives, retired IAS/IPS etc.

Result? Professionalism =nope, sycophancy=yes.4. Banks were forced to give loans @throwaway prices to farmers/ small

enterprises, sometimes even cost of giving loan (staff salary, light bill, office rentetc.) would be higher than the profit involved.

5. Local politician interfered in operations. Run “loan mela” in our Constituency,open all branches in RaiBareily and Amethi only, pass applications of ourchamcha-log. They would get lakhs of rupees @4% interest rate (to buy cattle)and then circulate the same money to farmers @36% interest rate and so on…

6. When banks tried to recover loan money from such political elements, t hey’d getstay order from courts, then “taarikh pe taarikh”.

7. This politicization even came into Bank employee unions- they’d always demandhigher wages and lower working hours, irrespective of how much profit bankmade.

8. adding insult to injury, RBI kept the CRR and SLR very high (15 & 40%respectively)

9. =very less money left for banks to lend.10. Business man cannot get easy loans = no business expansion =export declines =in

a way all this contributed to the Balance of Payment crisis (BoP) in 1991.

moral of the story = nationalization is not a solution – even if Sahara, NSEL,Ramalinga Raju, Ketan Parekh, Harshad Mehta or Mr.XYZ is doing scam- that doesn’tmean you should nationalize everything.

Narsimhan Committee I (1991)

By government of India in 1991. It recommended following:



recommendation result?

Government / RBI mustnot regulate thebanks’ loan interest rates. Banks shouldbe allowed to decide their home loan,bike loan etc rates by themselves.

RBI adopts BENCHMARK PRIMELENDING RATE (BPLR) => nowadaysBase rate system.

setup Debt recovery tribunals. so loandefaulters cannot get stay orders fromcourts, no more “Taarikh pe taarikh”

DRT setup in 1993 => later SARFAESI Actin 2002 to give them more powers.

Liberate Branch expansion policy. Letthe banks open branches outsideRaibarely and Amethi also.

done. banks can open branches anywhere.only condition 25% of the new brancheseach year must be setup in rural areas. Formore read Nachiket Committee article.

Reduce CRR and SLR so banks are leftwith more money to lend.

Done, gradually reduced. from (15,40)=>(4,23)

NBFC regulatory framework done

government should reduce itsshareholding from public sector banks.

done, SBI shares sold, nowadaysgovernment owns ~60%. (this facilitatesentry of professionals in the board ofdirectors)

Allow entry of private sector banks andforeign banks.

done, leads to first round of bank licences,explained below:

Bank licences: 1st Round (1993)

RBI invites application 1993New private banks start Operation: 1994-95 onwardsTotal ten private banks given licences: 6 still running + 4 closed down.

6 running

1. ICICI2. HDFC3. UTI=>became Axis bank (2007)4. IDBI5. Indus6. DCB

All of above running successfully, so that gives us “positive arguments”- that not allprivate entities are seamstress. in fact, ICICI, HDFC, Axis = top banks of India, evenhave presences abroad, employ lakhs of people. Hence no harm in giving bank licencesto private players.

4 closed down

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Bankmergedwith

why?

GlobalTrustBank

Orientalbank ofCommerce

recall Ketan Parekh- he took money from Madhupuracooperative Bank, A’bad and used it to run scam inSharemarket. Same Ketan had also taken some money fromGlobal Trust bank also=> news stories =>junta panics andruns to take out all money=> business collapsed.

Bank ofPunjab

Centurionbank

loss making. hardly any depositors and loan takers, couldn’tstand in competition against SBI, ICICI, BoB etc.

Centurionbank

HDFC same as above

TimesBank

HDFC same as above

These four #EPICFAIL banks give us the “negative arguments” that private companiesmust not be given bank licences. Because they can also close down like ^these, creatingpanic among the clients, blood pressure, heart attacks and suicides.

Anyways, moving on

Narsimhan Committee II (1998)

1. Introduce Voluntary retirement scheme (VRS) in public sector banks.2. Legal reforms for loan recovery. =>SARFAESI 20023. Computerization, electronic fund transfer, legal framework4. Payment and Settlement Act=>Retail (ECS, NEFT, Card) + Wholesale (RTGS)5. Continue allowing entry of private banks and foreign banks.

New Bank licences 2nd round (2001)

2001: applications invited2003-04: winners launch banks.

From the earlier #EPICFAIL of those four banks, RBI also learned lesson.

This time RBI gave licence only two strongest contenders:

1. Kotak Mahindra2. Yes Bank

New Bank licences 3rd Round (2013-14)

2010: Finance minister says we need to give more licences.2013, February: RBI invites applications with following conditions:



Conditions/guidelines for new bank licence application:

1. must include class 10-12-college marksheet, school leaving certificate and threepassport sized photos

2. 10 years’ successful work-ex (=”Fit and proper” criteria)3. minimum capital Rs.5 billion4. Will have to get shares listed on stock exchange within three years, bring down

voting rights to 15% within 12 years. why?

say Anil Ambani gets licence, in the beginning he’d have ~100% ownership anddecision making. But in the long run such “one man game show” = not good inbanking sector. So he’ll have to get the shares listed within three years.once shares are listed, junta starts buying those shares= they elect the board ofdirectors (BoD) and then BoD makes policy decisions of the bank, appoints CEOand top executives and so on.By 15 years, Anil should sell majority of his shares to junta- so that he holdsbarely ~40% or less of the bank shares = he cannot have lot of “say” in bank’sdecision making = bank doesn’t run according to his whims and fancies =rationaldecision making.

Anyways moving on to the rules

5. foreign shareholding must not be more than 49% (for the first five years)6. 50% of the directors should be independent (=not chosen by majority shareholder

e.g. Anil)7. Such bank must not invest in shares/bonds of its parent group (e.g. Anil’s

telecom/electricity business)8. must have viable business plan9. must open atleast 25% branches in the unbanked rural areas. (as per latest census

there are ~10000 such places)10. Have to comply with PSL (priority sector lending) norms.

Many other technical rules but for descriptive/interview answer- above 9-pointssufficient.

Total 26 applied, including Anil Ambani, Birla, Bajaj, Tata, Muthoot, Indian post.later two left (TATA, Videocon)+ one came (KC Land and finance ltd.)Thus 25 left.

Bimal Jalan Committee

Now Rajan had to decide winners among those 25 applicants.

Sep 2013: Rajan sets up RBI High level advisory Committee to process thoseapplications.



Bimal Jalan (Chairman) Former RBI governor

Usha Thorat Ex-RBI Deputy Governor

C B Bhave Ex-Sebi chairman

Nachiket Mor RBI board member

Important: Bharatiya Mahila Bank also launched in Sep’13 (but its public sector bank,has nothing to do with this “third” round of Bank licences or Bimal Jalan Committee)

Anyways, moving on

November2013

Bimal first meeting

February2014

Bimal submits report

March 2014Rajan fears Election commission’s model code of conduct, seekstheir approval.

31st March EC gives approval

2st April Two winners announced. (Bandhan Microfinance and IDFC)

Bandhan Microfinance and IDFC

Bandhan MicrofinanceIDFC (Infrastructure Development andFinancial Corporation)

West Bengal Mumbai

Micro-finance company infrastructure finance company

Chandra Shekhar Ghosh Rajiv Lall

net worth 1100 Cr., 45% branchesin rural areas

net worth 21000 cr., but rural presence low.

These two are given only “in-principle” approval. Meaning

In principle approval

Within 18 monthsmust get net worth Rs.1000 croreMust open 25% branches in unbanked rural areas.once they fulfill above conditions, RBI will give them licence under BankingRegulation Act, 1949 [Sec.22(1)]Once they get licence under BRA, then we can open current account, savingsaccount etc.

RBI has also prohibited the promoters (Ghosh and Lall) to hold CEO position in theirrespective banks. This is meant to prevent conflict of interest. Because in past, GlobalTrust bank’s CEO Ramesh Gelli was accused of involved in Ketan Parekh scam.

Curiously though Yes Bank’s promoter Rana Kapoor enjoys both MD and CEO position



in his bank!

India post

For Indian postal department, Bimal Jalan said “RBI should consult separatelywith government and give licence if necessary.”Kumar Mangalam Birla’s name involved in Coal block scam, Anil Ambani in 2Gcase, hence licence not given.

What is Differential licences?

Total 25 applied, but only two won so what about the remaining 23 contenders?Will they get any consolation prize? Yes.Rajan said they can later apply for Differential bank licences.Differential bank licences = for opening payment banks, wholesale banks etc(who’re not “full” banks like SBI, PNB etc.)for more on these differential banks read following articles on NachiketCommittee:

1. Wholesale Banks

2. Payment Banks

New Private banks: Pro and Against arguments

Anti arguments Pro arguments

There is no need for additionalprivate banks, existing bankssufficient.

Existing banks not sufficient for 100%financial inclusion.only one in two Indians have bank accountOnly one in seven Indians gets loan frombanks (others have to rely on the evil moneylenders who charge 36% compound interestrate!)

As per Census 2011

Only 67% of Urban households gettingbanking services.Only 54% Rural households getting bankingservices.

well in that case, governmentshould launch some Rajiv Gandhischeme to open bank accountsfor everyone, there is no need toget new private banks! Besides,

Throwing sakaari money, subsidies andschemes to solve every problem = bad idea.Business has to become vibrant by itself.It is true both Bandhan and IDFC are“mosquitos” compared to elephants like SBI

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these two (Bandhan and IDFC)are too small to be any relevantin “financial inclusion”.

and ICICI but every maestro was an amateursomeday.

As per your own table, Bandhanalready has 45% of her branchesin rural area as microfinancecompany, then why do they needbank licence? They’re alreadydoing financial inclusion!

as a Microfinance company, Bandhan cannotopen savings account / current account etc(Because they don’t have bank licence)as a result, such microfinance companieshave to borrow money from other banks,NABARD etc @12-15% interest + have tomaintain profit margin=> they give loans topoor people yes, but at 23-25% interest rate.but if same Microfinance company was givenbank licencee, they can accept public’sdeposit money under savings account ~4%interest, fixed deposit ~9% interest =>cheaper way to arrange loan money. can giveloans to poors at reasonable rate like 10-15%

In the first round, ten banks weregiven licence, four of themclosed down…..private sectorcannot compete with existinggiants. They try to take‘shortcuts’, hence all the scams.

The same licensing round gave us giants like ICICI,Axis bank and HDFC. It is wrong to think everyprivate player is out there only to bully, loot andsteal.

The same ICICI Bank, HDFCBank and Axis Bank were caughtviolating KYC norms and doingmoney laundering case in theCobra post sting operation.

RBI has taken quick and firm action against thosethree banks. And the inquiry revealed it wasn’t themass scale organized money laundering operationbut irregularity on part of certain branch managers to overcome the “targets”.

These two small players cannoteven afford to launch all IndiaATM network, forget aboutopening “branch” offices.

They don’t need to open ATMs anyways, becauseof the “White label” ATM scheme.

RBI should gave given licencesto more applicants, like they didin the 90s (ten licences).

In the early 90s, all nationalized banks wereheading towards #EPICFAIL, so to correct thecourse, RBI had to get in more players to breedcompetition. Same is not the case today- two newbanks are good enough. If Rajan gave licence to15-20 applicants at once => too much competition=> predatory pricing like in aviation industry =>smaller players will be wiped out.

Public sector banks are alreadybleeding because of the heavy In the end, Business is all about the survival of the

fittest. Public sector banks and their “trade unions”



marketing and teaser ratesoffered by Private banks. Twomore such banks will increasethe misery of the public sectorbanks.

should learn to perform or perish. Customerdeserves better services. Just to make life easierfor sarkaari banks, we must not prevent the entry ofprivate sector.

Rajan’s “American” ideas of freemarket, wholesale banks,differential licenses etc. willruin Indian banking sector andEconomy. What works in USAneed not automatically work inIndia as well. This will lead tosubprime crisis like disaster.

Just two new banks cannot create Subprime crisis.RBI is much more vigilant and strict than theirAmerican counter part US feds. It is wrong toassume that Rajan comes from America so he isautomatically an evil capitalist, and all the“hushiyaari” (smartness) is with Newspapercolumnists in The***** only.

More pro-con arguments can be added, post them in comments below!

Bharatiya Mahila Bank (2013)

This has nothing to do with Bimal Jalan Committee or third round of private banklicences. But to confuse you in MCQs, the examiner will deliberately include somefacts related to Mahila bank. Therefore, you must know the basics:

Budget 2013: Chindu announced to open this bank with 1000 crore Rs. (=100%State Owned / public sector bank.)Keep in mind, Chindu also setup “Nirbhaya fund” for women security initiatives.But that’s separate 1000 crore fund and this is separate 1000 crore bank. (trickyMCQ)Concept is not new: Pakistan and Tanzania already setup such banks in past.MBN Rao Panel prepared blue print (he was chief of Canara bank)Sept. 2013: licence givenNovember 2013: bank launched on Indira Gandhi’s b’day.HQ= Delhi but since assembly election was going on, hence to follow the modelcode of conduct, they launched the bank from Mumbai

How is it a Mahila Bank?

Boss Usha Anantha-Subramanian =womanBoard of Directors=all women.but staff = male + femalemid-level staff from BoB, PNB on deputation= male + female.Customers (Depositors) = male + female. (no distinction among them, both getsame interest rate on their savings account / FD etc.)BUT Loan giving => predominantly to women.Women entrepreneurs can get loans up to Rs 1 crore without collateral (meaningthey don’t have to mortgage their house/factory/jewellary)kitchen loans, education loans, small home-based catering businesses



Projects for Skill development, financial literacy among women.hence the name “Mahila Bank”- because it’ll predominantly cater the credit needsof women entrepreneurs and Self help groups.

Business plan of Mahila Bank?

1. By March 2014: 25 branches in capitals/major cities of India2. 25% branches in unbanked rural areas.3. By 2020: 700+ branches; 60k cr business

Software

as such most desi banks use “finacle” core-banking software designed by InfosysBut this Mahila bank got Core Banking Software by FIS (American Co.)

(^ya this type of GK essential for IT-graduates for the bank interview stage.)

Why Mahila Bank is mere publicity stunt?

(Interview Q.) Bharatiya Mahila Bank is a mere symbolic exercise for feel goodpublicity. Do you agree? Yes/No and Why?

I already mentioned the Positive points 1 cr. loan without collateral, skill developmentfor women etc.

But in Group discussion/ interview, you need to be aware of the negative points as well,in case the other party decides to play “Devil’s advocate”.

Mahila Bank is mere tokenism, without substance because:

1. SBI, PNB, BoB better suited, they have pan-India presence including in ruralareas. Govt. already majority shareholder. Could have launched the 1 crorewithout collateral scheme without Mahila Bank.

2. 25% rural branching: duplication of effort.3. In the first phase focus on state capitals and UT = real need of women financial

inclusion is in rural areas and not those big cities.4. Mid-level executives all “imported” from BoB, PNB etc. such deputed staff

usually don’t have or motivation to put their blood and sweat in making this newbank successful. Their loyalty remains with their own parent bank only.

5. They’re offering 4.5%/5% interest rate on savings account but pan India presencenecessary, otherwise customers won’t feel attracted. Besides private banks likeKotak already offering 6%

Visit Mrunal.org/Economy For more on Money, Banking, Finance, Taxation andEconomy.

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URL to article: http://mrunal.org/2014/04/economy-new-bank-licences-bandhan-idfc-bharatiya-mahila-bank-differential-bank-licences-bimal-jalan-committee-narsimhan-committee-arguments-favor-bank-nationalization-historic-evolu.html

Posted By Mrunal On 17/04/2014 @ 17:02 In the category Economy

mrunal new bank licences_ ready revision note for ibps & upsc

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