That said, some of the conditions appear stiffasking new entrants to ensure that 25% of their branches are located in unbanked rural centres seems unfair since it would pressure the banks profitability in the initial years. Since banks need to list on the exchanges within three years of starting operations, they could have been given some time to expand their presence in the hinterland. In any case, forcing rural obligations has not worked in the past for any sectorin even telecom, where it was part of the licence conditions, rural penetration improved only once those markets turned profitable. Given that, as the adjoining column points out, 74% of all bank deposits and 82% of credit are accounted for by the top 200 centres, it will be a long while before rural branches are even remotely profitable. The fact that government-owned banks, who have less of an eye on the bottom line, havent made large forays into unbanked areas makes it clear the stipulation is onerous. In any case, given how banking correspondents are being tried out as alternatives to rural banks, the stipulation makes even less sense.
Asking promoters to pare their stakes to 20% in 10 years and 15% in 12 years appears a good idea from the point of view of corporate governance. However, the timelines could have been stretched because its only fair that the promoters are able to get an attractive enough price for their sharesmore so since RBI rules will make it tougher for banks to turn profitable. Capping non-resident shareholdings at 49% for the first five years appears aimed at ensuring hot money doesnt capture local banks, but if 74% is allowed for existing banks, this presents a level-playing field issue. That new entrants would be asked to operate through the structure of a non-operative financial holding company was always expected because it would ring-fence the bank from other businesses that a conglomerate might be running. From the point of view of investors looking to see whether India is opening up to new businesses, the guidelines couldnt have come a day too soon.