RBI grants 'In-Principle' banking licenses to IDFC and Bandhan

April 4, 2014

RBI has granted “in-principle” banking licences to Infrastructure Development Finance Company (IDFC) and microfinance lender Bandhan Financial Services Ltd. The declaration was made by RBI after nod from the Election Commission. RBI had sought a go-ahead from the Election Commission prior to declaring the awardees, as the model code of conduct is in place in the run up to the elections. These are the first licences to be awarded by RBI since 2003-04.

RBI constituted Bimal Jalan panel scrutinized the applications for new bank licences. The exercise took a long time (around four years) as there was a debate over the issue: whether corporate houses and entities with exposure to real estate should be given licences. 25 applicants, including Reliance Capital, Aditya Birla Nuvo, L&T Finance, etc. were amongst the applicants who were left disappointed with the decision by RBI.

Prior to this in-principal approval, India has 27 public sector banks, 22 private sector banks and 56 RRBs (Regional Rural Banks).

What is the ‘in-principle’ approval by RBI?

The in-principle approval by RBI is valid for ONLY 18 months. During this 18 month-period IDFC and Bandhan Financial Services Ltd will have to meet all RBI rules and guidelines in order to secure a permanent licence to start banking activities.

Timeline:

1994: Private Sector allowed to set up banks; 9 licenses issued
2004: Two more Bank Licenses issued (YES Bank got one and Kotak Mahindra Bank was allowed to convert itself into a bank from a finance company).
2011: FY-2011 Budget mentioned the need for more licenses in private sector
2011: (August) Draft Guidelines issued
2013: (February) Final Guidelines issued
2013: (July) RBI invites applications; 25 aspirants apply
2014: (April) RBI issues in-principle licenses to 2 applicants (Infrastructure Development Finance Company (IDFC) and microfinance lender Bandhan Financial Services Ltd.)