A banking license is a pre-requirement for a financial Institution that wants to provide banking services. The fundamental banking activities is taking deposits from the general public and lending the money to the deserved. Banking licenses are issued by the Banking Regulatory Body and there is a relatively long and complicated procedure that goes into the application. This procedure will also depend on the type of bank license applied for. Licensing is generally broken down into different categories, while each category has a different specialization and a different time frame involved in the banking license application process.
The main bank license is the one that allows the bank to engage in all of the activities that one would expect a major bank to undertake, including retail banking, merchant acquiring, cash management, asset management and trading. Obtaining a bank license that allows an institution to engage in all of these activities will generally take the longest, and cost the most. Additionally, however, the institution can apply for one that has fewer or even only one specialization.
In India, licensing of banks comes under Banking Regulation Act, 1949 and there is an existing policy relating to bank licensing. Prior to the enactment of Banking Regulation Act, 1949, the provisions of law relating to banking companies formed a part of the general law applicable to companies and were contained in Part XA of the Indian Companies Act, 1913. These provisions were first introduced in 1936, and underwent two subsequent modifications, which proved inadequate and difficult to administer. It was recognized that while the primary objective of company law was to safeguard the interests of the share holder, that of banking legislation should be the protection of the interests of the depositor. It was, therefore, felt that a separate legislation was necessary for regulation of banking in India. With this objective in view, a Bill to amend the law relating to Banking Companies was introduced in the Legislative Assembly in November, 1944 and was passed on 10th March, 1949 as the Banking Companies Act, 1949. By Section 11 of the Banking Laws (Application to Cooperative Societies) Act, 1965, the nomenclature was changed to the Banking Regulation Act, 1949.
The existing regulatory framework under the Banking Regulations Act 1949 can be categorized as follows:
In terms of Sec 22 of the Banking Regulations Act 1949, no company shall carry on banking business in India, unless it holds a license issued in that behalf by Reserve Bank of India, and any such license may be issued subject to such conditions as the Reserve Bank may think fit to impose. Before granting any license, RBI may require being satisfied that the following conditions are fulfilled:
As per Section 5 (b) of Banking Regulation Act, 1949 ‘ banking ‘ means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.
Section 6 of Banking Regulation Act, 1949 gives the details of forms of business in which a banking company may engage.
However, it is a long list and banks may carry out one or more activities permitted in the section.
The approval of licenses for IDFC Ltd and Bandhan Financial Services marks the start of a cautious experiment for a sector dominated by lethargic state lenders, many of which are reluctant to expand into rural areas or towns where banking penetration is low. No new Indian bank has been formed since Yes Bank in 2004.
Indian microfinance company Bandhan Financial Services said it would launch banking operations in August, making it the newest lender in the country which seeks to make banking more accessible to its rural population.
Bandhan and Mumbai-based financial company IDFC Ltd were the only two companies to be granted bank permits last year in what was the first bank licensing process in a decade. Yes Bank was the last bank to be set up, in 2004.
Millions of people in India do not have access to formal banking services. The decision to grant new banking licenses marked the start of a cautious experiment to create more competition in a sector dominated by state lenders, many of which are reluctant to expand into rural areas or towns where banking penetration is low.
Over the last few years, the Reserve Bank of India has been pushing banks to make more genuine efforts to penetrate into people of in all classes and increase lending to farmers, small traders and businesses.
RBI Governor, Raghuram Rajan, said that the central bank will keep issuing new licenses to applicants it deems fit as and when required. RBI’s approach in this round of bank licenses could well be categorized as conservative. At a time when there is public concern about governance, and when it comes to licenses for entities that are intimately trusted by the Indian public, this may well be the most appropriate stance.
RBI has issued licenses to both IDFC, a Mumbai-based non-bank financial company, specializing in infrastructure lending, and Bandhan Financial, a microfinance organization based in Kolkata.
The central bank said it would also consider an application from India Post, but under a separate process to be carried out in consultation with the government of India. The central bank said 25 applicants had been considered and judged under criteria including analysis of their financial statements, their track record over the past 10 years and their potential to run a bank.
India has 27 state-run banks and 22 private sector banks, according to RBI data, but its ratio of branches to adults is only about one-fourth of Brazil’s, leaving about half of households in India – a country of 1.2 billion people – outside the banking system.
Over the last few years, RBI has been pushing banks to make more genuine efforts to penetrate into India’s hinterland and increase lending to farmers, small traders and businesses. Also Government of India has recently launched a scheme like Jan-Dhan Yojana where every person may have bank access. The RBI formed a four-member external panel to start evaluating the applications for new bank licenses from November but has made clear that it will go slow. It also said that it will consider giving out partial licenses that would allow companies to provide only few banking services, and consider bank applications on more regular basis as it learns lessons from the initial licenses.
International experience and practices of licensing procedure followed in major jurisdictions by the respective regulators have been grouped into two: limited banking license –equally applicable both for domestic and foreign banks; and limited bank license –different for domestic and foreign banks. In addition, there are countries where different licenses are issued for commercial banking, savings bank, rural banks or credit unions. In certain counties no distinction is made between domestic and foreign banks. Thus, there is no widely accepted recommended model available internationally.
One of the major objectives of banking sector reforms has been to enhance the efficiency and productivity of the banking system through competition. It is also aims of authorities to provide banking services to each and every people of India. To enable the banking system to operate at optimum efficiency, and in the interest of financial inclusion, it is necessary that all banks should offer certain minimum services to all customers, while they may be allowed sufficient freedom to function according to their own business models. Thus, it will be prudent to continue the existing system for the time being. The process must be simplified and the progress and the difficulties should be reviewed periodically to modify the process
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