High entry barriers to new bank licences to stay: Fitch

Permission for new banking licences in India is likely to be highly selective given the challenges that new entrants face and the cautious approach of the Reserve Bank of India.

In a new report, ratings agency Fitch Ratings expects the RBI to exercise stringent selection criterion before granting new licences. "Applications are likely to vary considerably in both quantum and type. The risks could be very different this time, with corporate houses expressing interest in a bank licence."

The new entrants have to address financial inclusion, comply with priority-sector lending targets, and position 25 per cent of their branches in rural areas, all of which could combine to limit their profitability and restrict applicants to those with deep pockets and also to those with a strong commitment and successful track record.

Issuing licenses to business conglomerates could increase corporate governance risks, despite RBI's attempt to regulate these issues, cautions Fitch.

The new guidelines announced on 22 February are tough, requiring a successful track record of at least 10 years, greater minimum capital, and viable business plans that meet prudential requirements.

The central bank's strong focus on good corporate governance, and its ability to supervise a consolidated banking entity under the recently passed banking reforms, could help in enforcing checks and balances to monitor additional risks.