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Reserve Bank shuts tap on new bank licences for three years

The central bank wants all the new players who have got licences in the last 3-4 years to stabilise, and see how they are progressing

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In another departure from its past policies, Reserve Bank of India (RBI) has decided to "shut the tap" on on-tap bank licences, people aware of the development said.

The central bank has decided not to issue a single new bank licence in the next 2-3 years, sources said.

"RBI's Board of Financial Supervision has taken 'in principle' decision to not issue any new bank license for now," a source said. The central bank wants all the new players who have got licences in the last 3-4 years to stabilise, and see how they are progressing. If the progress is satisfactory and banks do well, then RBI may do a rethink, sources said. Though RBI won't communicate the same view officially to new licence applicants.

AVENUE CLOSED

  • RBI wants all the new players who have got licences in the last 3-4 years to stabilise
     
  • If their progress is satisfactory and banks do well, then RBI can do a rethink

The thinking within the regulator is that banks who got universal licences in the past could not do well on their own. IDFC Bank had to do a merger with Capital First to consolidate its position, while Bandhan Bank acquired Gruh Finance to scale up its operations. Most of the small and payments banks are struggling to make their presence felt. Similarly, many old private banks could not do well, so they are exploring mergers with big NBFCs or waiting to be acquired by some big banks. Even in PSU bank space, consolidation is on the cards.

While RBI won't be issuing new bank licences, the old private banks which are exploring merger of NBFCs will be free to apply for approval. RBI will decide on such requests on a case-to-case basis.

In 2015, the then RBI governor Raghuram Rajan had come up with an on-tap policy for banking licences. Under the policy, window was open any time for applicants, and if found suitable RBI would issue licences. Two universal banking, 11 payments bank and 10 small finance bank licences were issued in 2015. The idea behind small finance banks was to help in financial inclusion to un-served and deserving sections of the society, mainly to small business and low-income households. Similarly, the payment bank licences were issued to help low income and migrant workers in remittances.

As per RBIs Report on Trend and Progress of Banking in India 2017-18 released in December 2018, nine out of 10 small finance banks were earlier NBFCs, so due to NPA legacy issues they had to make high provisions, resulting in losses. Similarly, seven payment banks are operating and total consolidated balance-sheet of payment banks showed net losses during 2016-17 and 2017-18. Even operating profit of these banks remained negative.

UAE Exchange had applied in June 2017 for a banking licence, but it is still pending with the regulator.

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