The beam of light coming in the way of the NBFCs who are looking forward to a banking license may not be a light that hopeful. The reason behind this setback is RBIs plan along with the Government of India to restrict the new entrants to cater to the needs of only the rural and semi urban mass of customers.

"New entrants may only be allowed to open branches in rural areas for the first two years and the subsequent spread will depend on the basis of their direct lending to the agriculture sector, opening of no-frill accounts, and other financial inclusion criteria," a finance ministry official said.

The government had announced that it wanted banking licenses to be provided to NBFCs who have a strong rural presence so as to move ahead with RBIs objective of maximum financial inclusion in India.

According to a senior RBI official, "The proposed move in the budget about opening up of the banking space is to achieve the larger aim of financial inclusion. If new banks also start competing in urban and semi-urban areas, the whole concept will falter."

The budget has proposed that RBI as well as the Government will work with hands together to spread banking activities in those areas which have a population above 2000 by March 2012.

As per RBI data, while 27 public sector banks have opened 13,381 branches so far in rural areas, the 22 private sector banks, both old and new, are far behind with 1,113 branches.

According to a finance ministry official, the RBI may also come up with strict guidelines on capital provisioning for new entrants. "The new guidelines will ensure that the financial stability of the banking space is maintained," the official said.

Private sector players are also lagging behind in lending to the priority sector. The government has already created a Rural Infrastructure Development Fund (RIDF), where shortfall from priority sector lending is diverted to take up rural infrastructure projects.