"The Commission is of the view that the Reserve Bank of India may take necessary action as deemed appropriate," the poll watchdog wrote to RBI Governor Raghuram Rajan on Tuesday. JPN/Agencies
The approval came after the RBI missed the March-end deadline for issuing the first bank licence in almost a decade.
The RBI approached the Election Commission (EC) on March 12 seeking its approval for granting bank lincences as the model code of conduct had come in place after the general elections announcement on March 5.
The RBI had received 27 applications initially. Later, Tata Sons and Value Industries withdrew, leaving 25 contenders in the race.
Public sector India Post and IFCI and private sector Anil Ambani group and Aditya Birla group were among the 25 players in the fray. Bajaj Finance, Muthoot Finance, Religare Enterprises and Shriram Capital have also applied.
In the past 20 years, the RBI has licensed 12 banks in the private sector in two phases. Ten banks were licensed on the basis of guidelines issued in January 1993. Kotak Mahindra Bank and Yes Bank were the last two entities to get banking licences from the RBI in 2003-04.
Granting of new bank licences not a political process: Rajan
Affirming that the grant of new bank licences is a regulatory process and not political, Rajan said the central bank sought the Election Commission's nod only to shield the announcement from any political controversy.
"This (giving bank licences) is not in any way a political process. It is an economic and regulatory process and therefore seen as distant and different...we have to undertake what we have to undertake," he said in response to objections raised by the BJP.
Earlier this week, BJP leader Piyush Goyal had said the RBI should be stopped from issuing licences just a month before a new government is formed.
Post EC nod, analysts feel the RBI will soon grant bank licences
The industry experts believe that the central bank will soon hand out the new licences to eligible candidates. The RBI is expected to give licences to only a few aspirants in the current phase, they said.
Ashvin Parekh, former EY partner and currently the promoter of Ashvin Parekh Advisory Services: The EC nod shows that issuing banking licence is the prerogative of the RBI and not a political action and therefore it is a very constructive step as it has been in the work for the past three-and-a-half years.
PwC India Associate Director for Financial Services Robin Roy: All decks are cleared for the RBI to move ahead and announce the names of those who will get the in-principle licence. The next couple of days will be very interesting to watch out for in this context.
E&Y India Head of Banking and Financial Services Abizer Diwanji: The EC's decision is a very positive step. As Governor Rajan has said rightly, it is not a political process, but a regulatory process. And the fact that the EC gave the go-ahead only reaffirms what the Governor has said.
Rajan says payment banks on the anvil
Rajan said after the current phase of new bank licences, the Reserve Bank will go ahead with the differentiated licencing process starting with payment banks and then proceed to have universal "on-tap" licencing.
"Quiet soon we hope to open the window, it may be that we may open the window first for differentiated banks licences, for example payment banks and then move to opening the on-tap for universal (licence) down the line," he said.
Rajan said ground work with regard to this is ready in the form of the discussion paper on 'Banking structure -the way forward' and RBI will have to build up on that.
Additionally, the learnings from the ongoing process of awarding bank licenses will also help in the diligence and vetting, he said.
"The point is, we should not be giving licence every 10 years...the hope is to make this an ongoing process," Rajan said, stressing the need to go beyond current practice.
Rajan said this structure of having a specialised bank devoted to payments or lending, will also help aspirants of a universal banking license to develop the capabilities to grow.
"This would allow people to develop banking capabilities even with a relative small size of operations, which will then allow them to apply for a full banking licence down the line," he said, choosing not to give a timeline by when he expects action on the front.
Since there are so many applicants and all of them cannot be given licence at a go, Rajan said, "The idea is that once we give this set of licences, there might be some applicants who might be suited for a different kind of licence. We want to tell them that the possibility is opening up and we will get more people there."
"The Commission is of the view that the Reserve Bank of India may take necessary action as deemed appropriate," the poll watchdog wrote to RBI Governor Raghuram Rajan on Tuesday.