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New banks on the block

Apr 28 2013, 00:05 IST
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SummaryAmid the suspense of who will be the final winners of the third round of banking licences,

Amid the suspense of who will be the final winners of the third round of banking licences, we take a look at the challenges before the newcomers, as well as the RBI in giving out the licences

The third banking wave: bigger, better?

After the misadventures of 1993 and success stories of 2001, it remains to be seen if the RBI will be liberal with its licences now

Aparna Iyer

The Reserve Bank of India will give out banking licences to private sector entities this year after a gap of a decade. While the jury is still out as to how many licences would be given, the central bank's experience in the last two instances will have a bearing on the number.

In 1993, when the banking sector was opened up for more private sector players, the RBI doled out nine licences. Of the nine banks set up, only five remain solvent (IndusInd Bank, HDFC Bank, ICICI Bank, Axis Bank and IDBI Bank), with the other four (Times Bank, Centurion Bank, Global Trust Bank and Bank of Punjab) having to be merged with others owing to financial problems. Three out of these four banks were set up by individual promoters, while one was set up by a non-banking finance company (NBFCs).

Owing to an almost 50% failure ratio in 1993, the RBI refrained from giving out licences until 2001, when only two licences were issued. One was to Ashok Kotak and Uday Kotak for setting up Kotak Mahindra Bank and another to Rana Kapoor for starting YES Bank. Both these banks have grown in size and stability over the years and are strong success stories. The RBI has so far not given bank licences to large business houses, but this could change now as the new guidelines state that entities or groups in the private sector can set up banks.

Even contentious real estate companies and brokerage companies have not been ruled out.

And, as prospective applicants get ready with their blueprints in 2013, NBFCs are seen as stronger contenders than the rest given their past experience. Analysts feel NBFCs such as Shriram Group, L&T Finance, IDFC and Tata Capital could be the main contenders this time around .

HDFC Bank, ICICI Bank and Axis Bank were also promoted by large financial institutions. IndusInd Bank was promoted by a diversified corporate house, the Hindujas. ICICI Bank was incorporated with a total paid-up capital of R165 crore and

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