b mahapatra : implications of new bank licences inaugural address by mr b mahapatra, executive director of the reserve bank of india, at the post graduate students ’ conclave on “ implications of new bank licences ”, at the national institute of bank management, pune, 28 september 2013. * * * the assistance provided by shri s. s. barik, general manager, rbi, is gratefully acknowledged. 1. i have great pleasure and privilege in associating myself with the conclave of the post graduate students of national institute of bank management ( nibm ), pune. i am indeed grateful to director allen c a pereira for inviting me to deliver the inaugural address. nibm is a premier educational institution of the country in the field of banking and finance and it is but natural for them to select a subject of topical interest for this conclave. 2. i understand that the objective of this conclave is to explore the implications of new bank licences on the banking sector, and that, some of the eminent bankers and ceos of nbfis, who have interest on the subject are also present to express their views, besides the students of the institute. i am sure the conclave will generate a lot of heat and throw much light during its deliberations. i congratulate director pereira and his team for this. the broad picture 3. before i proceed with the subject, let me first present as a backdrop, a broad picture of today ’ s indian banking and financial system : indian financial system is bank dominated – banks ’ share at 63 per cent of total assets of the financial system, is followed by insurance companies at 19 per cent, non - banking financial institutions at 8 per cent, mutual funds at 6 per cent and provident and pension funds at 4 per cent, of the total assets of the financial system. even among the commercial banks, public sector banks have dominant number of branches at about 67, 000, followed by private sector banks at about 13, 500 and foreign banks at about 325 branches, constituting 83 per cent, 16. 6 per cent and 0. 4 per cent respectively of the total number of over 100, 000 branches of banks. licensing of new banks – a historical perspective 4. historically, commercial banks in india were privately held. however, postindependence, from 1951, the government of india adopted planned economic development for the country through five year plans. the economic planning envisaged state ownership of the

##r in many aspects. i would like to mention how their presence would have implications for the banking industry. first and foremost, with the setting - up of new banks under the nofhc, financial holding company ( fhc ) structure will be introduced in the banking industry for the first time. this will be a marked departure from the present bank - subsidiary model under which indian banks operate. the government of india is also contemplating a holding company structure for public sector banks. the existing private sector banks are expected to follow suit, in line with the shyamala gopinath committee recommendations. secondly, the new banks will bring in new business model, new products, new processes, new technologies, etc. the level of productivity, efficiency and customer service would be expected to be higher. the existing banks may have to re - orient some of their businesses, technologies, etc. thirdly, the existing banks would face competition, both on their assets and liabilities side of the balance sheet, from the new generation banks and have to devise ways to withstand the competition or they may lose their existing customers, who may move away to new banks. banks that cannot compete would be vulnerable to acquisitions / take over. possibility of voluntary amalgamation amongst some banks cannot be ruled out. fourthly, the public sector banks, as a group have a dominant market share of about 72 per cent. they are likely to shed some weight over time and the share of private sector banks as a group would increase. fifthly, indian financial system is bank dominated. the financial system will be broadened and deepened with the entry of new banks in the private sector. the market share of the banks, as a segment, in the financial system ’ s assets would increase over non - banks, if the business houses with major nbfcs come out successful in getting bank licences. in that case, they would convert nbfcs into new banks or transfer the lending activities of the group nbfc into the new bank, as per the requirement. implications for the economy 37. finance is fuel for the economy. banks being at the core of the financial system, provide this fuel. the progress of the real economy depends upon the growth of the banking and financial system. an efficient financial system transforms the savings into investments and channelizes the investments to productive sectors of the economy to spur growth. india is an emerging market economy and has the potential to grow faster. as the indian economy refocuses on the expansion of manufacturing and