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Relevance of New Banks
The Government of India is currently under the process of issuing few licenses to start banking business in India. As the government and its agency, the Reserve Bank of India is advocating the concept of larger banks in place of smaller and weaker Indian banks to counter the challenges paused by international banks.

This present move by the govt sounds paradoxical. The government has its own compulsions and reasons behind the present move.
 

Bank Nationalization
In 1955 imperial Bank was nationalized to form State Bank of India. In 1960 seven state banks were nationalized and were converted to subsidiaries of SBI. In 1969 the ruling congress govt under the leadership of Indira Gandhi nationalized 14 prominent Indian banks having deposits of more than ` 50 Cr. The objective behind this exercise was to extend banking assistance to the masses. Again in 1980, six more banks were nationalized with deposits of more than ` 200 Cr bringing 90 % of banking activities under public sector domain. Nationalization brought in a lot of changes in the banking industry. The management of the major financial institutions, by the boards decided by the government brought welcome changes to the Indian economy. The Indian Banks started extending their services to the rural population of India.
 

The bank nationalization brought along a number of problems as well. Many banks lost its’ professionalism due to political interference. The political parties started utilizing banking machinery for their political gains. Irregular loan accounts piled up in banks affecting bottom line of most of the public sector banks. The militant trade unionism in banks added salt to the already bleeding Banks as a result; the banks became white elephants within a few years of its’ Nationalization.
 

Move by the government to denationalize the banks
Government of India was forced to infuse capital to many of the public sector banks for keeping them operational. By the end of eighties, the government had decided to find a permanent solution for this stalemate in the public sector banks. They mooted the idea of de nationalization for some of the non performing public sector banks which invited strong resistance from trade unions in banks and finally the idea was dropped by the government.
 

Formation of new generation banks
In the early nineties the government came out with the idea of licensing few banks in private sector which were to work in a fully computerized atmosphere with all modern amenities. Preference were given to banks supported by financial institutions, leading to existence of new generation of banks, out of which some of them disappeared after few years after their inception. Banks including ICICI bank, HDFC Bank, Axis Bank, IDBI Bank Indus Ind Bank and the late entrants Yes bank and Kotak Mahendra Bank were made to work in a different platform from that of the old generation banks. The new generation banks have re written their model of functioning of banks in India and created a revolution in the banking sector. The approach of new generation bank was a great relief to the customers who dealt with them. User friendly and prompt service, late hour banking, introduction of core banking solutions and ATM service etc were some of additional services extended by these new generation banks. While the public sector banks are limping for progress the new generation banks has grown by many folds in the last two decades with the change in approach from them and it forced the old generation banks to fall in line . However this exercise failed to support majority of Indians who were below the poverty line and settled in rural villages.
 

Proposal for Merger & Acquisition
Even though the banking system in India is regulated by the Reserve Bank of India the size of our banks were not in comparable size with the international banks and it has been a concern for the regulators ever since the liberalization of our economy. This was a persistent concern for the government, as being the largest owner of Indian Banking system. The government proposed merger and acquisition route for strengthening the banking system in India which led to the idea of merger of subsidiaries of State Bank with the principal. Some more subsidiaries are yet to be merged with SBI.Another proposal was to merge some of the unviable public sector banks to form few strong banks. This proposal is still under the scrutiny of the government. The idea of the government is to reduce the number of banks and increase the strength of each entity.
 

The latest move by the Government.
Two major disturbing realities of Indian Banking Industries are -:
• Our banks are not in comparable size with the international banks .Hence the competitiveness of the Indian Banks to support the growing Indian economy is at stake as compared to its’ International counterpart.
• Majority of our population especially rural population are outside the ambit of banking system.

To extend competitive service to the growing economy, our banking system should have a level playing strength with their international counterparts. This may be one of the reasons for the Government to encourage banks for merger and acquisition. In the near future this may become a reality. A number of banks in the public and private sector will merge to become banks with international standards.
 

Now all the payments from government to its citizens including, subsidiaries, grants , concessions and other payments from government are indented to be paid through banks to avoid any misuse of machinery by middlemen. Thus it become mandatory for every citizen including those belonging to the BPL category to have bank accounts with any one of the banks in India. The present banking system has failed to penetrate in to the rural population. Consequently it has become necessary to give license to more banks to achieve this goal. The recent move by the government to give licenses to more banks will resolve this problem to a large extend.

Front runners for banking license.
The Reserve Bank of India received applications from 26 aspirants from different fields for banking license. It include NBFCs, Corporates, Microfinance Institutions, Government Agency namely Post Office and Infrastructure Financing NBFCs. Experts predicted that the government may issue 3 to 4 licenses but FM gave indication that the number may go up further.
 

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P E Mathai, an ex banker having 35 years of experience in Banking. He retired as the General manager Development and planning from South Indian Bank in the year 2010. ...

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