Financial inclusion is one big reason why the government is considering allowing more banks in.
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Budget 2010: Big Picture
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economic survey
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Kaushik Basu
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Budget: Regulation
With the RBI around, does India really need a super regulator?
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Budget 2010: Social Schemes
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Budget 2010: The Economy
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Budget 2010: Prices
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The budget envisions a bigger role for the IT sector in meeting the country’s socio-economic agenda. The industry will live up to the task.
Som Mittal
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View: Budget
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Naina Lal Kidwai
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View: Budget
The speech was one thing. The facts are another, when you take a closer look at the Budget.
S Gurumurthy
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VIEW: Budget
Higher indirect tax revenues mean that the poor will be hit hard. The Budget will reduce the disposable income of the common man.
Sitaram Yechury
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There’s a significant increase in the plan outlay for infrastructure. Now, it’s time to show results on the ground to match the good intentions.
Vinayak Chatterjee
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View: budget
The Finance Minister has pulled off a tough balancing act—he has reined in the fiscal deficit and provided a roadmap for the next two years.
Rashesh Shah
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One of the surprises of the Budget was the announcement that the Reserve Bank of India (RBI) is considering giving new bank licences to private sector players and also to non-banking financial companies (NBFCs).
Many business groups that also run NBFCs have been keen to own banks. “There are great chances for NBFCs to float banking services,” says Kishore Biyani, founder and CEO, Future Group. “This makes it a level playing field for others to come in.” The Future Group has been building a financial services business in recent times. “Why not? We are open to such opportunities,” says Ramesh Iyer, Managing Director of Mahindra & Mahindra Financial Services, when asked if his company would like to become a bank. “NBFCs are important for economic growth. The need for credit is very large and there aren’t enough people being served. There is room for more banks,” he adds.
Mahindra & Mahindra Financial Services, with a reach of 370 branches, mostly in villages and small towns, may be the perfect candidate for a new banking licence. It hails from a reputed group that has adequate capital. But, more importantly, its rural reach will enable financial inclusion. This also is the motive behind the government considering the entry of new banks. New banks are required to open 25% of their branches in rural and semi-urban areas. The government wants to provide banking facilities to all habitations with a population in excess of 2,000 by March 2012. It intends to provide insurance and other services using the banking correspondent model, thus covering 60,000 habitations.
Existing banks haven’t quite done that yet. Today, nearly 50% of the population does not have a bank account and only 40% have a savings account. “Even if one takes a look at the balance sheets of these private banks, fee-based income has a greater component. Thus, core banking which is the primary need of the hour, is neglected,” says Rakesh Kumar, research analyst at Karvy Stock Broking. By suggesting that it could allow new banks, the government may be hoping that existing players will also do more towards financial inclusion.
This will be the first time since 2003 that the Reserve Bank would be giving banking licences to individuals and NBFCs. The last time it granted banking licences was in May 2004, when it awarded them to three bankers—Rana Kapoor, Ashok Kapur and Harkirat Singh—to set up commercial banking operations (YES Bank). Prior to that Uday Kotak’s Kotak Mahindra Finance (KMFL) was permitted to convert its NBFC into a bank (Kotak Mahindra Bank) in February 2003.
But, in some ways, this is a policy U-turn. The RBI, in the past, has not been keen on allowing NBFCs to enter the banking sector. Back in the sixties, nationalisation had pushed corporates out of banking. “The experience of NBFCs turning into banks is a mixed one,” says Ashvin Parekh, Partner and National Leader, Global Financial Services, Ernst & Young. This can be seen from the experience of Times Bank and Centurion Bank of Punjab. Today, both have merged with HDFC Bank. Even other NBFCs that turned into banks, including IndusInd Bank, haven’t been able to expand their reach.
Abizer Diwanji, Head, Financial Services, at KPMG India, doesn’t expect the floodgates to burst open. “Not more than two or three bank licences will be handed out,” he says.