India Hasn’t Licensed a New Universal Bank Since 2016. Why That’s a Problem

RBI's restrictive guidelines hinder new bank licenses since 2016, stalling banking entrepreneurship.

Only ‘financial sector’ individuals/entities can apply for a banking licence, which excludes more than 80 percent of businesses.

(Photo: IANS)

The Reserve Bank of India (RBI) released the guidelines for ‘on tap’ Licensing of Universal Banks in The Private Sector on 1 August, 2016. Since then, only seven entities or individuals have applied. One application was rejected, and no licences have been issued.

The government de-governmentalised IDBI Bank in 2018 by selling a majority stake to LIC, and decided to privatise it in 2021. Yet, the sale is still stuck in the process. The government also announced privatisation of two public sector banks (PSBs) in the 2021-22 budget, an announcement has been long forgotten.

What explains this inaction in India’s banking space, and the killing of banking entrepreneurship in the country?

Universal Bank Licensing Guidelines

The guidelines restrict the granting of new banking licences to three categories of promoters with a minimum of ten years of experience or track record:

1. Resident individuals in banking or finance at senior level.

2. Corporate entities/groups with minimum assets of Rs 5,000 crore, subject to its non-financial businesses not exceeding 40 percent of total assets/gross income.

3. Non-banking financial companies (NBFCs) controlled by residents with minimum assets of Rs 5,000 crore and non-financial business not exceeding 40 percent of total assets/income. 

These conditions are highly restrictive and enervating.

Only ‘financial sector’ individuals/entities can apply for a banking licence, which excludes more than 80 percent of businesses.

This might not have still been too bad as banking is a specialised financial sector business and India has many financial entrepreneurs/businesses. However, another set of restrictive conditions relating to shareholding makes it deadly. 

The applicant promoters are allowed to hold high (minimum 40 percent) controlling voting equity capital initially. They have to, however, bring down the shareholding to less than 40 percent within five years, less than 30 percent within ten years and finally, to less than 15 percent within fifteen years of getting licence. 

No serious applicant for banking licence can forget the fate of Uday Kotak, the real financial entrepreneur who set up Kotak Mahindra Bank, the last strong universal bank in the private sector.

If you have to lose the control of the bank you set up with your capital, blood and toil after fifteen years, why take the trouble anyway?

Yet another condition puts the last nail in the coffin. The promoter/group has to satisfy a ‘fit and proper’ criterion at all times, putting the financial entrepreneur at the mercy of RBI officers.

While this criterion may help RBI in showing the door to a rogue banker, it is highly subjective and makes its applicability to individual/groups completely at the discretion (if not the whims and fancies) of the RBI officialdom. The bankers become so mortified that they shudder to write even a letter to RBI to point out obvious contradictions in regulator’s policies and guidelines.

No Interest from Strong Entities 

The RBI has disclosed some names of applicants for on-tap licences. 

The UAE Exchange and Financial Services Limited was the first one to apply, as informed in an RBI press release on 30 June, 2017. Four other applicants—REPCO Bank, Chaitanya India Fin Credit, Pankaj Vaish (and others) and Annapurna Finance—were mentioned in subsequent press releases.

While the RBI has not issued further press releases, two more applicants— AU Small Finance Bank and Jana Small Finance Bank—have announced that they have applied for a universal banking licence. 

This makes a total of seven applicants for the universal banking licenses. Without casting any aspersion on the applicants, barring two small finance banks whose progression to a universal bank is understandably natural, the other applicants are quite weak and non-serious applicants. 

It is not surprising that all strong NBFCs (in the upper layer of NBFCs) or in other financial businesses have stayed away from applying for a universal banking licence to convert an existing NBFC or set up a new bank.

It seems quite clear that none of the applicants, barring possibly one small finance bank, would be granted a universal banking licence. 

The universal banking license guidelines were issued nine years back. The experience must convince the government and the RBI that there is a lot fundamentally wrong in its policy framework.

No IDBI Bank or PSB Privatisation

I was instrumental in seeing through the government cede majority control to LIC in the IDBI Bank in 2018, as a sure first step to its privatisation.

The IDBI Bank is not a public sector bank (PSB), as it was not nationalised or established through an act of Parliament. It was only in May 2021 that the government approved a "strategic disinvestment along with transfer of management control in IDBI Bank." At that point, the government and LIC together held a 94.72 percent stake, with LIC alone holding 49.24 percent.

An Expression of Interest (EoI) was invited in October, with the government offering to sell 30.48 percent stake and LIC another 30.24 percent, aggregating to 60.72 percent. The applicants successfully assessed qualified interested parties (QIPs) were to be invited to make bids. 

There is has been no official press release about the progress of IDBI Bank privatisation since then. Informally, a senior government official indicated in June 2024 that four applicants’ fit and proper status was being adjudged by the RBI.

In July 2025, another senior official said that the Inter-Ministerial Group (IMG) met on 9 July, 2025 to discuss the Draft Share Purchase Agreement (SHP) for IDBI Bank sale, and was confident that IDBI Bank stake sale will be concluded by October 2025. 

It has been more than four years since the government approved strategic sale in IDBI Bank.

Still, there is no clarity about the regulatory dispensation (less than 15 percent in fifteen years or other) or foreign ownership (equal treatment to Indian bank licensees or otherwise) as two of the four applicants are presumably foreign entities. 

Given the reluctance of the RBI in permitting strong promoter ownership of banks and the government’s reluctance to let foreign ownership in Indian banks (except in cases when a sick or faltering bank is to be kept afloat), it seems highly unlikely that the IDBI privatisation process would get concluded any time soon. 

In this scenario, there is no point talking about the government’s aborted move to privatise two public sector banks, grandly announced in 2021-22 budget. While there may be another round of consolidation of 12 PSBs, the privatisation of any PSB is absolutely unlikely during the reign of Prime Minister Modi. 

Reframe Licensing Rules First

Banking, in today’s financial world, is a tough business. It is also facing serious competition from NBFCs, digital banks, and emerging crypto banks. Only exceedingly strong financial entities/entrepreneurs will be able to build a new bank and compete successfully.

The first thing required to make the strong financial entrepreneurs interested in setting up banks is for the government and the RBI to shed their preference for a widely-held ownership structure for banks, which actually means that no one is in charge. 

Let the eventual ownership condition be changed to minimum of 51 percent for ten years, to be brought down to 26 percent over the next twenty years. The fit and proper criterion has to be also more tightly defined to exclude only those with record of frauds or other financial misdeeds. 

The existing private banks must be given the benefit of this framework. The foreign applicants should have similar national treatment. The present IDBI Bank privatisation process should be scrapped and reinitiated in line with new rules. The government must also privatise two PSBs with the same dispensation. 

This will herald the era of strong banking sector in India.

(Subhash Chandra Garg is the Chief Policy Advisor, SUBHANJALI, and Former Finance and Economic Affairs Secretary, Government of India. He's the author of many books, including 'The $10 Trillion Dream Dented, 'We Also Make Policy', and 'Explanation and Commentary on Budget 2025-26'. This is an opinion piece, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)