Banking licences to IDFC, Bandhan won't create clones in system

The Reserve Bank of India's (RBI) decision to grant "in-principle" approval for a banking licence to two applicants, namely IDFC and Bandhan Financial Services, is clearly aimed providing banking facilities for a specific set of borrowers.

These two have been chosen out of the 25 which have applied for banking licences.

IDFC, an institution focused on infrastructure financing, will make available much needed funds to sectors like telecom, power, roads and ports. It is not that other banks don't do infrastructure funding, but the cost of funds from IDFC was quite high because as a NBFC it was not allowed to raise low cost current and savings bank deposits. With its domain knowledge in infrastructure , the IDFC will be able to play a much bigger role in infrastructure financing than in the present form as NBFC.  

Bandhan Financial Services is a microfinance institution, which lends to people at the bottom of the pyramid. Like IDFC, Bandhan also suffers from funding constraints as it has to borrow from banks or the market at high rates. A banking licence to Bandhan would help in scaling up micro finance lending in the rural areas.

Clearly, the RBI has not gone for big corporate names in its first list as thereby it would have created clones of the existing banking system.

"RBI's approach in this round of bank licences could well be categorised as conservative," says the central bank while adding, "At a time when there is public concern about governance, and when it comes to licences for entities that are intimately trusted by the Indian public, this may well be the most appropriate stance."

Those ignored - at least in the first round - include Reliance ADA Group, Aditya Birla, Bajaj and players like LIC Housing Finance and India Post.

Today, banks are actually clones of one another as they operate in the same segments like home loan, car loan, personal loan with identical product details or loan size. These new banking license to IDFC and Bandhan will create and develop new segments.  

Going forward, RBI plans to use the learning from the current licensing exercise to revise the guidelines. It actually wants to give licenses more regularly, that is, virtually "on tap". RBI says some of those entities who did not qualify in this round for a full-fledged banking licence could well apply in future rounds or could apply for differentiated licences under the proposed framework.