Bank licences on tap in India but hardly anyone to tap…

There is somethbing totally weird going on these days. Earlier, even despite a policy showing clear evidence of an impact, policymakers and media doubted the evidence. The idea was to wait for more evidence. Now as a policy is announced, its success is known and announced. No evidence is needed at all!

Such was the case when Indian central bank announced universal bank licences shall be available on tap. No one cared to ask why the central bank gave licences to just two players from a wide pool of some 20 plus applicants just 2 years ago. So, if the central bank did not deem any of the major players to fit the requirements, it was unlikely things would change. Moreover, the reality check has suck in that opening a bank does not mean free money at all.

So after opening up of the banking tap, there are no takers so far:

Much before the question of value was explored in depth by economists, Adam Smith was confounded by the problem why diamond with hardly any use was more valuable than essential water. Something similar is happening in Indian banking as to when licence was rationed, there was a scramble, but when it went on tap, hardly anyone is tapping.


Tough conditions like high capital requirement of Rs 500 crore and large industrial houses with such resources being barred from bidding for licences themselves could be deterrents.

“People take time to understand that banking makes money only over a long period of time, so you have to be willing to take that call,” said Deepak Gupta, joint managing director, Kotak Mahindra BankBSE -0.65 %. “For the first five years, banking is an inferior model than an NBFC and banks have a problem of bureaucratic costs like compliance, and risk which is significantly higher than an NBFC, plus branches and ATMs.”

Gupta, whose bank was an NBFC before converting into a bank, says that while typical operating cost of a bank was anywhere between 2% and 2.5% of its total assets, for an NBFC it is less than 1%. The dynamics of the industry are fast changing and the mushrooming of financial technology companies are threatening even established banks’ bread and butter business.

Happy realisation..


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