Reserve Bank of India has released the list of 26 Banking license applicants who have sought licences under the new licenses to be released.

The list of aspirants is as follows.

1. Aditya Birla Nuvo Ltd., Mumbai.
2. Bajaj Finserv Ltd., Pune.
3. Bandhan Financial Services Pvt. Ltd., Kolkata.
4. Department of Posts, New Delhi.
5. Edelweiss Financial Services Limited, Mumbai.
6. IDFC Limited, Mumbai.
7. IFCI Limited, New Delhi.
8. Indiabulls Housing Finance Limited, New Delhi.
9. India Infoline Ltd., Mumbai.
10. INMACS Management Services Limited, Gurgaon.
11. Janalakshmi Financial Services Pvt. Ltd., Bangalore.
12. J M Financial Limited, Mumbai.
13. LIC Housing Finance Ltd., Mumbai.
14. L & T Finance Holdings Limited, Mumbai.
15. Magma Fincorp Limited, Kolkata.
16. Muthoot Finance Limited, Kochi.
17. Reliance Capital Limited, Mumbai.
18. Religare Enterprises Limited, New Delhi.
19. Shriram Capital Limited, Chennai.
20. Smart Global Ventures Pvt. Ltd., Noida.
21. SREI Infrastructure Finance Limited, Kolkata.
22. Suryamani Financing Company Limited, Kolkata.
23. TATA Sons Limited, Mumbai.
24. Tourism Finance Corporation of India Limited, New Delhi.
25. UAE Exchange & Financial Services Ltd., Kochi.
26. Value Industries Limited, Aurangabad.

RBI appears to be indicating that only 5 or 6 licenses are likely to be granted. The list contains several large corporates as well as Government owned and public sector organizations. It would therefore be a tough time for RBI to prune the list of 26 to around 6.

From the days of Bank nationalization in 1969 and subsequent partial de-regulation, Indian Banking industry has undergone a significant change of character and the new licenses are likely to be another mile stone in the history of Banking in India. The earlier Banks were born in the era where human interface was predominant and “Service” was a virtue. But the present environment is different. We are today living in a digital world where Bankers would not like to see and interact with its customers face to face and rather prefer to deal with them as “Numbers” or “Log in IDs”. Also “Service” is only a “Tool to make profit”. The new licensees will be born in an era where “Profit” is likely to be the only goal. This could seriously destabilize the Banking system as we know in India.

Naavi.org has time and again emphasized that RBI should not allow distortion of “Banking” as a concept of business developed over time with a focus on “Channelizing public savings fro productive use” and use “E-Money Shop” license as a separate category to feed the desires of the modern day “profit at any cost” Bankers. It is such a “Profit First Customer Next” approach which has made current Banking system extremely unsafe for common Bank customers and forced Naavi to take up a crusade for “Safe E Banking”

At a time when the Indian Banking system is reeling under the pressures of an in-secure technology system entry of several new entities will pose further risks to the Indian Banking consumers. Unless RBI ensures that new licenses are issued strictly on “Public Welfare Criteria”, Indian Banking is likely to permanently lose its character as a “Preferred Destination of Small Savings”.

The approach of the new generation banks have been to cater to the “Elite” category of customers and neglect the needs of the common man. Cost of Banking has been n the increase despite large scale automation. There is widespread “Money Laundering” and “Fake Currency Exchange” occurring within the banking system. The “Commercial” nature of the Banks have made them “Greedy” Banks and the customer has been bullied into accepting services at a cost and security level that are unreasonable from the user’s perspective. “Service to community” is no longer an objective of Banking.

In fact going by the arguments I have personally heard in many of the Bank fraud cases, most Banks consider themselves as “Money Shops” and they donot even appreciate the meaning of “Banking” as an institution to channelize public savings to productive areas.

In recent days, RBI is losing control of the industry and has become a pawn in the hands of influential commercial Bankers. The fact that recently most Banks have reverted to levying extra charges for SMS alerts of transactions, use of Cheques, Drawing of Cash from Banks, and also charge usurious penalties for unintended delays in loan or credit card repayments, use draconian methods of recovery of loans, associate themselves with property mafias and underground criminals in black money transactions and property seizures etc makes one wonder if the Indian Banking system has become a huge extortion racket where depositors are driven out of the system to other more risky investment channels.

The list of aspirants contain some names which are bound to evoke a fear that managements which are already thriving in black money wealth are interested in Banking license so as to convert their own black money into Bank deposits rather than mobilize savings from the public.

RBI should therefore consider “Ability to mobilize savings from grass roots” as the basic criteria for selection.

Secondly, large corporates already have many banks wedded to them and hence another criteria for selection should be “Ability and Orientation” to engage in “Retail Productive Banking”. Retail Banking does not only mean financing Luxury Cars and real estate but financing small trade and entrepreneurial activities.

Above all, “Commitment to Serve” as embodied by the Gandhian principles encapsulated in the following statements is to be considered as the key determinant for selecting the successful licensees.

“A customer is the most important visitor on our premises.
He is not dependent on us. We are dependent on him.
He is not an interruption in our work. He is the purpose of it.
He is not an outsider in our business. He is part of it.
We are not doing him a favor by serving him. He is doing us a favor by giving us an opportunity to do

……………………………………………………………………..Mohandas Karamchand Gandhi

I wish RBI adopts the right approach to new Bank licensing and uses this opportunity to correct some of the imbalances that have crept into the Banking system in recent days and ensures that “Safe and economic Banking for the Common man” is the key goal of the new Bankers. There is need to look for managements which are “People Oriented” rather than focusing only on “Profit at any cost”. 

Naavi

It is reported that RBI is considering use of Aadhar as a second factor authentication for Credit Card transactions.

Report in TOI here

The cost of upgrading the card swipe mechanism at the merchants with a biometric capable instrument is being held as a stumbling block. However it is also necessary to examine if the move has legal sanction.

First of all the UIDAI bill is yet to become law. A case is before the Supreme Court to decide the examine the validity of the scheme. But the Government is going ahead with the scheme to render it more and more difficult for Courts to cancel the scheme.

Further the current move talks of using aadhar for “authentication”. It is to be noted that “Authentication” of a customer’s instructions is the prime responsibility of the Bank.

The move proposed by RBI  means that UIDAI will be used as an outsource partner of the Bank to examine and authenticate a customer of the Bank. This raises the question as to whether in this process the “UIDAI” will act as an “Officer” of the Bank and “Pass Payment Instructions of the customer” and if so whether this is legally within the mandate of Banking.

If however this system of “Outsourcing” is to be legitimized, the Bank has to execute an SLA with the UIDAI authorities and follow the instructions on information security issued by RBI for “Outsourcing”.

If these considerations are not taken into account, the move will be contradicting RBI’s own earlier instructions.

Naavi

Naavi has been following the developments in the Indian Banking scenario for the last 4 decades and has closely been associated with the industry as an employee of the Banking industry as well as a consultant and critique. In the background of this experience and in the environment of growing Cyber Crime threats around us, Naavi expresses his concern that Indian Banking industry is heading for a crisis created by  hasty introduction of technology without appropriate security initiatives being put in place.

Though the GGWG (G.Gopalakrishna Working Group ) recommendations provided a comprehensive guideline to the Banks, there is still a glaring shortfall in its implementation. At the same time there is an immense pressure on the regulator to further ease the controls on Mobile Banking and expanding the services of the Banks into non-Banking areas.

In the light of these developments, Naavi places before the public and the industry some requirements which appear to be needing immediate attention.

Recently, the Governor of RBI commented that no institution other than the “Bank” should be allowed to accept deposits from the public. This was in the context of the fraud in Chit Companies in West Bengal which resulted in a loss to several investors. We may recall here that it was a move against CRB Capital in the alte 90s that  prompted RBI to take steps to introduce mandatory Credit Rating for NBFCs accepting deposits. (Refer article “Don’t Massacre the NBFCs” and other articles around that time in Naavi.org). It is nearly 15 years since this decision which killed the NBFC industry as it was known at that time and was flourishing. If we look back on this decision, it is difficult to say that the move actually helped general investors. The failure of CRB Capital was a reflection of the failure of the regulatory agency itself but the corrective action taken by RBI at that time instead of helping the investor community at large actually killed a beautiful investment option available to middle class investors in India. The investors driven out of NBFCs at that time lost more money when other honest companies closed down under the artificial pressure created by the measures taken by RBI. They also tried to find alternative places for investments and since Bank interest rates were too low, they went to mutual funds and lost more money. It is a valid debate even today if these losses are to be attributed to wrong policies on the part of RBI.

A similar situation is developing now in the Banking industry today regarding some policies associated with the promotion of Technology use in Banks. I need to record my apprehension that some of the policy initiatives require immediate retraction as they are likely to affect the future of Banking in India. If the depositors who are depositing their money with banks for an interest rate of 7.5% p.a. as against 15% p.a.they were used to during the NBFC days, are to be disillusioned again, it is not clear where they can run to?

This time it will not end up with the depositors losing their money but they will take down the Indian Bank industry with them.

There are two important threats that are looming large now in the regulatory policies. The first is the information security risks from the Mobile Banking initiatives. The second is the diversification of Banks into ancillary services such as “Insurance Marketing”.

The Banking industry is yet to present a secure banking platform for Internet Banking and we are struggling to make them adopt security measures that were first suggested way bank in 2001 by RBI. Banks instead of improving the security of their systems are trying to persuade the RBI to dilute the security requirements. This is evident in the actions initiated by Payments and Settlement department and the promotion of Mobile Banking. it appears that the resources of IDRBT is being spent more in facilitating use of mobile banking applications rather than finding vulnerabilities in the systems and finding solutions. in my opinion, “Mobile Banking” is the poison which will completely destroy the confidence and trust which customers today have on an institution called “Bank”. It is therefore necessary for RBI to call for an all India virtual seminar on Mobile vulnerabilities and invite Cyber Security Experts to participate and express their views. From the RBI side the representatives of the payments and settlement department and IDRBT should participate with an open mind and assess the risk profiles which the cyber security experts may express.

The second aspect which is changing the profile of Banking in India is the loading of ancillary responsibilities such as “Insurance Marketing” to Bankers. RBI has indicated that it is under pressure to allow multi brand marketing where one bank could market several insurance company products where as RBI is insisting that they can market only a single brand. Whether it is multi brand or a single brand, Insurance product is a financial product and is in conflict with Bank’s own business and hence there is no logic in allowing Banks to cannibalize on its own business. By allowing Banks to become insurance marketing agencies, Banks will gradually cease to be “Banks” and become “Finance Houses”.

This will mean that one the one hand RBI does not want non Banks to accept deposits, Banks themselves will become “Non Banks” in course of time. The fact that other policies of RBI such as “Disincentivisation of cheques” also are aimed at changing the traditional Banking activities, the cumulative effect will accelerate the change in the profile of Banking business in due course.

Additionally the Payments and Settlement department is thinking of new system of consumer to consumer payments through the mobile network which is again a business which is not “Banking”.

I therefore suggest that RBI should formulate a new category of Financial institution such as “E-NBFC” and provide a separate license to deal with C2C mobile payments in addition to the relatively insecure mobile banking business. The mobile banking business itself should not be a direct link to the regular bank account and should be handled in a subsidiary account similar to the way margin money account on share trading accounts are handled.

Naavi

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