Time To Celebrate, India Gets A New Bank

After little more than a decade, a new private bank is born in India—Bandhan Bank Ltd. This is the first bank to come up in eastern India after Independence. A new bank is always welcome as a large slice of India’s 1.2 billion population does not have access to formal banking services. Theoretically, the scenario changed after the launch of the Pradhan Mantri Jan-Dhan Yogana in August 2014, which has enrolled 175.7 million depositors and collected deposits of Rs.22,394 crore, but the project is more about opening bank accounts than giving loans.

After India embraced economic liberalization following a severe balance of payment crisis, the Reserve Bank of India (RBI) opened the doors for a set of new banks in January 1993. It received 113 applications, many from large industrial houses. Noted economist-bureaucrat Sharad Marathe, the first chairman of the erstwhile Industrial Development Bank of India, reviewed the applications and nine new banks were set up and one cooperative bank was allowed to convert itself into a commercial bank. Not everyone has survived. For instance, Times Bank Ltd was merged with HDFC Bank Ltd; Global Trust Bank Ltd was forced to merge with Oriental Bank of Commerce; and Bank of Punjab Ltd was acquired by Centurion Bank Ltd to form Centurion Bank of Punjab Ltd, which in turn was taken over by HDFC Bank.

In January 2001, RBI issued guidelines for the second set of new banks. A committee headed by former RBI governor I.G. Patel scrutinized the applications. Two licences were issued, including the conversion of a non-banking financial company into a bank—Kotak Mahindra Bank Ltd.

In the past, RBI’s stated objective behind giving licences had been to introduce competition in the banking sector, largely dominated by state-owned banks. This time, its objective is to bring about greater financial inclusion in a nation where only 35% of adults have access to formal banking services, according to a 2012 World Bank working paper.

Three years after former finance minister Pranab Mukherjee announced in 2010 that a new set of banks would be set up, RBI released the final guidelines on licensing norms in February 2013 and applications were received till 1 July 2013. A panel, headed by former RBI governor Bimal Jalan, sifted through the applications. The candidates eligible to apply for a banking licence needed to have a 10-year track record and they should never have been under the scanner of any regulator, enforcement or investigative agencies. Twenty-six companies had applied, but the Tata group later opted out. The list of serious applicants included corporate houses such as Aditya Birla Nuvo Ltd and Reliance Capital Ltd and financial intermediaries such as LIC Housing Finance Ltd and L&T Finance Ltd.

In the past, when RBI opened doors for new banks, they were set up in the north, the south and the west, but not in the east. Incidentally, RBI was set up in Kolkata, but its headquarters were shifted to Mumbai in 1937. Among the first banks in India was Bank of Hindustan, established in 1770 in Kolkata, then Calcutta, under European management. It was liquidated in the early 1830s. State Bank of India, the nation’s largest lender, originated as the Bank of Calcutta in June 1806. Calcutta was also the first port of call for major foreign banks in India.

Currently, Kolkata houses three banks. Allahabad Bank, the oldest of the three, was set up in Allahabad in April 1865 by a group of Europeans. United Bank of India has its origin in United Bank of India Ltd, formed in 1950 with the amalgamation of four banks. Uco Bank was set up after the historic Quit India movement in 1942. Their combined branch network was 7,735 in fiscal 2014, less than 9% of the 39 listed banks’ nationwide branch network; they have a little over a 6% share of deposits and less than 6% of loan assets.

The east and the northeast are the most under-banked regions in India. Out of around 126,000 bank branches, the east accounts for 16%, and the northeast only 2.6%. West Bengal, the fourth largest state in India by population, where Bandhan Bank has its largest branch network, accounts for 5.62% of bank branches, 6.22% of deposits, 4.67% of credit and for every Rs.100 the banks mobilize in this state, Rs.58 is given as loans. Bandhan Bank will also have many branches in Bihar—the third largest Indian state by population, which accounts for 4.78% of the branch network, 2.44% of deposits and 1.05% of credit, and where the credit-deposit ratio is 33.26%. Barring Odisha, Assam and Uttarakhand, all other states in the east account for less than 1% of branches, deposits and credit, and these branches offer loans to the extent of one-fourth to one-third of the deposits they mop up.

It looks like Bandhan will strive to change how banking is done in India. It is starting with a 6.7 million borrower base, catered to through 2,022 doorstep service centres across 35,000 villages in 22 states, and will continue to give small loans. Many of its 500 bank branches will raise deposits to support the credit portfolio, but more importantly, it will also collect deposits from small savers who are often being taken for a ride by the so-called shadow banks. West Bengal has more companies raising money illegally from the public than any other state. Going by a recent report of the Securities and Exchange Board of India, 104 of 194 companies against whom the market watchdog has taken action for raising money by issuing debentures and equity are from this eastern state.

Indeed, there are challenges as many more banks—of different kinds and sizes—will come up in next few years and state-run banks are likely to change their approach to business. The Bandhan model may encourage other banks to extend their turf and embrace financial inclusion in a meaningful way.

Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank, India’s newest bank. He is also the author of Sahara: The Untold Story and A Bank for the Buck. Email your comments to bankerstrust@livemint.com. His Twitter handle is @tamalbandyo

This blog first appeared in www.livemint.com