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April 19, 2024

Revamped Criteria for Universal Bank Licences: A Look at Key Changes in Licensing Standards

Exactly a decade ago in April 2014, the Reserve Bank of India (RBI) embarked on a significant move by granting universal banking licences to two entities: Bandhan Financial Services and IDFC. Since then, the landscape has seen minimal alterations, with no fresh universal banking licences issued. However, the winds of change are palpable as the licensing criteria witness notable shifts. Here’s a closer examination of the key changes:

1. On-Tap Licensing:
Perhaps the most consequential change is the shift to an on-tap licensing system. Unlike the previous method where entities had to await the regulator’s initiation of the process, prospective applicants can now apply at any time, streamlining the licensing procedure and fostering a more dynamic banking environment.

2. Corporate Entry:
An internal working group of the RBI has proposed a groundbreaking reform: allowing corporates to enter the banking sector. While this recommendation awaits acceptance, its potential implications are profound, potentially reshaping the banking landscape in India.

Small Finance Banks (SFBs):
Since their inception in 2015, the small finance banking sector has experienced gradual expansion. Initially, ten licences were granted, and recently, two more have been added to the roster. Presently, there are 11 SFBs following the merger of Fincare SFB with AU SFB. However, the RBI has maintained selectivity, rejecting applications from seven entities seeking to operate as SFBs.

Payments Banks (PBs):
In 2015, the RBI paved the way for ten entities to operate as Payments Banks. However, the journey has been rocky, with several entities surrendering their licences before commencing operations. Notably, one Payments Bank is currently awaiting consideration for conversion into an SFB, underscoring the fluidity within the banking sector.

Status Check:
A comprehensive review reveals that the RBI has received thirteen applications under the ‘on-tap’ licensing framework for universal banks and SFBs. However, the regulatory scrutiny has been stringent, with eleven applications being rejected thus far, leaving only two under active consideration.

In conclusion, the evolution of licensing criteria reflects the RBI’s commitment to fostering a robust and adaptable banking ecosystem. While the path towards inclusivity, particularly with regards to corporate entry, remains in flux, the regulatory landscape promises continued dynamism and evolution, ensuring the resilience and relevance of India’s banking sector in an ever-changing global landscape.

Jhumpa Lahiri

Jhumpa Lahiri

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