By Ruma Dubey

Out of 26 aspirants, only two candidates were approved – IDFC, which was largely expected but the surprise was lesser known Bandhan Financial Services. No one really knew much about this Kolkatta based company and everyone scrambled to ‘google’ it up. And the story of the company and its founder, Chandra Sekhar Ghosh, a sweet vendors son, setting up a micro finance company in 2001 to become the largest micro finance company in India by 2014 was no small joke.

At the same time, RBI rejected 24 other aspirants, majority of them corporate houses. And since then the biggest question dogging the mind is – why were they rejected?

The answer probably lay in the question – why were IDFC and Bandhan approved?

First IDFC. Financial soundness apart, its shareholding pattern is diversified. FIIs hold around 51%, DIIs hold 31% and in this, Govt of India holds 17.24% stake. And its functions are like that of a quasi bank – lending to infrastructure projects and project finance. It is a direct contributor to economic growth through its ending to infra organizations.  But it has no experience in banking per se, which is lending to retail investors, SMEs. And rural reach? It does not have any, except for the roads which are built across India using funding from IDFC. Its loan book size is at a gargantuan Rs.60,000 crore and thus there is no question about its size or viability.  The way ahead for IDFC, which has hit a road block due to economic down turn and logical step ahead, was to become a bank. More importantly, there is no corporate governance issue w.r.t IDFC and that in today’s time is a big plus.

On the other hand, Bandhan Financial is a micro finance company, spread over 19 states, headquartered in West Bengal. It became an NBFC in 2006 and has 52 lakh borrowers, all from the lowest strata of the society. Thus for Bandhan, financial inclusion or opening branches in rural India will not be an issue as 45% of its 2000 branches are already in unbanked areas.  In terms of corporate governance, Mr.Ghosh is said to be a man of principles, with frugal branches. His organization has consciously avoided any funding from PE funds and has raised only Rs.50 crore in 2009 from SIDBI.  This company has successfully integrated microfinance, development and non-profit activities.

Thus the two candidates who have been approved are essentially already functioning like a bank and are high on corporate governance. Unlike those rejected, none of them are part of a conglomerate group of companies; there is no conflict of interest here. Yes, IDFC’s efficiency in operating as a bank, lending to SMEs and having a presence in India will be tested just as Bandhan’s lending to corporate will be.

RBI seems to have paid heed to apprehensions raised over granting licenses to corporate houses as there is bound to creep in some or the other conflict of interest. More importantly, a bank, first and foremost means trust. And that trust can came in only if there is not even a single crease on their reputation. Almost all the aspirants, including Birla (named in coal scam) to LIC Housing, Ambani, all have had a brush with corporate governance and it did dent some part of the trust factor. L&T Finance in that sense was the cleanest but then there is the issue of conflict of interest and it is yet to fully mature as a NBFC.  Thus based on the overall choice, RBI’s words ring right, “the approach in this round of bank licenses could well be categorised 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.”

Thus RBI has probably analysed the core objective behind each aspirant asking for a banking license. And this could be categorized into – the lure of big profits to be made because banks will grow almost twice that of the economy. Then there is the logical need to expand, to get cheaper funds and this would include the likes of LIC Housing, IDFC, IFCI and Tourism Finance Corp. The other category is probably this urge to grow from being a mere NBFC, which as such gets some step motherly treatment, though many function almost like a bank.  Each company which has applied fits into one of these categories and probably based on this, RBI has segregated them. Capital adequacy and financial muscle is a given in every applicant so that could never be the criteria for a rejection.

Two good points for the future – firstly, the RBI has not closed the door on others. It has in fact said that they can reapply and reiterated the need to go for on-tap banking licenses instead of this stop-and-go licensing. Secondly, India Post, the most promising candidate which did not get the approval yesterday; RBI has stated that it will consider its application after consulting with the Govt. Now this is one organization which should ideally be a bank, given the fact that it has the largest network in the world with over 1.5 lakh post offices.

All in all, kudos to RBI for selecting logically, not swaying to market needs and sheer power of the people applying. IDFC and Bandhan seem the best choices and now it is upto them to get up and start the banks before October 2015.