Mumbai, India (PressExposure) June 23, 2011 -- India's banking sector is in for a long-awaited overhaul.
The Reserve Bank of India's long-standing opposition to allowing conglomerates into the lucrative banking sector will be scrapped soon after it publishes draft guidelines outlining the rules to enter the club, according to sources familiar with the matter. The move will bolster competition in an industry dominated by inefficient and antiquated state-owned banks. But the process will not be smooth.
That's because the entry of big business into retail banking will face strong opposition from India's increasingly vocal civil society, angered by a string of corruption scandals that have engulfed the world's largest democracy.
What is about to change?
When the RBI issues new banking licenses industrial conglomerates like Reliance Industries, Tata Group and Mahindra & Mahindra, will be allowed to apply for the licenses, something they have not been able to do since former prime minister Indira Gandhi nationalised all privately owned banks in 1969.
Who wants to enter the sector?
Anil Ambani, the billionaire behind Reliance group, brothers Malvinder and Shivinder Singh, who control Religare, and the founders of Mahindra & Mahindra, have confirmed their interest in applying for a licence. Other potential applicants include the Tata Group, which has declined to comment on the matter, and Reliance Industries (RIL), the group controlled by MukeshAmbani, the elder and richer brother of Anil. (RIL has denied it plans to apply for a licencehowever a number of people have told the FT that it is still considering doing so once the new guidelines are out).
Who would benefit from their entry?
The conglomerates would be the major winners. India's banking sector has been growing at record levels since the mid 1990s on the back of the country's phenomenal economic growth. Moreover, an overwhelming majority of India's 1.2bn population has no access to basic banking services, which means that there is ample space of expansion for anyone entering the sector.
India's middle class is also likely to be a winner. The entry of new players in the banking sector will help modernise the industry and will add the kind of competition that has helped improve other sectors in the country, such as telecoms and air travel.
There is, however, an on-going debate over whether the entry of the conglomerates will help achieve one of the most important political goals for the ruling Congress party: financial inclusion.
Venugopal Reddy, governor of the RBI between 2003 and 2008, told beyondbrics that new banks might want to focus more of servicing the up-and-coming urban population rather than opening branches in rural areas, where more than 70 per cent of the population lives.
"I'm not sure that allowing big corporations to enter retail banking will fix the country's financial inclusion objectives...the RBI will have to set some clear conditions to make sure that they contribute to that goal," he said.
When will all this happened?
The RBI's report should come out any time within the next few weeks but - as it is often the case in India - it will take sometime before conglomerates will start opening branches around the country.
In the last year India has been hit by a number of corruption scandals that have raised serious questions about the rising influence of big business over the political sphere. Civil society in the country is likely to oppose conglomerates entry into the sector as they fear that the risks will overcome the benefits of their entry.
Once the RBI draft guidelines are published it is likely that the government will wait for the noise surrounding the corruption scandals to quieten down before they move ahead with implementing new rules and start issuing licenses. Predicting when it will happen is impossible.
Whats' the bottom line?
India's is finally moving towards opening up the retail banking sector to the benefit of a big chunk of the population and more so of the family-owned conglomerates. This is a very big step for a nation that tends to move slowly when it comes to reforms. However, it will take a while before we'll see the changes taking place. This is just the prologue of a new chapter in India's banking sector.