Motley crowd in queue for new banking licences

The towering Reserve Bank of India (RBI) headquarters on Shahid Bhagat Singh Marg in Mumbai was the scene of unusual activity all through the past week. A motley crowd of hopefuls trooped in to apply for new banking licences before the deadline for doing so expired on July 1 (Monday). In all 26 aspirants have thrown their hats in the ring - though the RBI will be awarding three or four new banking licences at best. "Let's give it a shot," seems to have been the prevailing attitude.

Among the 26 is an authorised dealer, the UAE Exchange India Ltd, which basically helps non-resident Indians remit money back to India. There are two micro-finance institutions, Bandhan Financial Services and Janalakshmi Financial Services, there is the well known gold loan company, Muthoot Finance Ltd and two financial services companies, which are primarily into stockbroking, Edelweiss and India Infoline. There is the giant housing finance company, LIC Housing Finance, as well as the dedicated infrastructure player, IDFC Ltd. There is even the Tourism Finance Corporation. And last but not the least, there are the big corporate houses - the Tata Group, the Aditya Birla Group, Bajaj, L&T Finance, Anil Ambani's Reliance ADA Group, the Shriram Group, the Singh brothers' Religare and more.

All are keen to own banks by drawing in low cost funds through savings and current accounts (CASA) and building a sustainable business model.

But it will not be as easy as it looks.  All over the world, banking is a serious and highly regulated business. Private sector players such as ICICI , HDFC  and Axis who got their licences in the early 1990s took years to build a business of meaningful size. There were players from that time who had to wind up or merge with a larger player in due course. New generation private banks - Global Trust Bank and Centurion Bank - are good examples.

Even today, it is public sector banks which dominate the banking business in India despite the competition and superior services offered by the private banks.

While assessing each candidate, the RBI will certainly take into account issues such as financial inclusion, focusing on segments existing banks are not looking at, financial muscle as well as the government's view of the applicants.

From the financial inclusion perspective, the case of the two micro-finance institutions looks quite strong. Similarly, LIC Housing Finance and IDFC are strong contenders as they can support the housing and infrastructure needs of the country respectively. Access to low cost funds will give a fillip to these sectors. But banking analysts say there is also a danger of concentration risk. The near-collapse of the entire infrastructure sector due to land delays, issue relating to governance and the mining scam. Similarly, there is an issue of geographical risk in the case of microfinance institutions. Large corporate houses with a strong presence in financial services also fit in well to create large banks.

If size, wide geographical presence and financial inclusion are the overall themes, India Post, which has also applied, has a very strong case. The RBI will find it tough to strike a balance. The players, too, will have to think and rethink their strategies.

Already Mahindra Finance, initially very keen on a banking licence, chose to opt out at the last minute. The grass isn't always greener on the other side.