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Monday, July 1, 2013

RBI's new bank license norms: Now, corporates may vie for takeovers in banking sector

The deadline is 24 hours away. By the end of day on July 1, some 40 applications of corporations seeking a banking licence are expected to reach the doorstep of the Reserve Bank of India (RBI). Only four or five are likely to get the go-ahead.

The applicants still in the fray — after the apex bank did its bit to clear ambiguities with 124 pages of answers to 422 questions in the first week of June — are hopeful. A few, like Mahindra Financial Services and Sundaram Finance, decided to walk away after they felt the regulations were not suited to their aspirations.

Among the clarifications, the RBI made it clear that it wants clean promoters and it will do a background check. For instance, it will seek information from the Central Bureau of Investigation, the Income Tax department and the Enforcement Directorate before it grants licences.

Of course that's not what kept away the ones who have turned their backs on banking. Rather, analysts point out that tight priority sector lending norms and doubts about meeting requirements in terms of CRR ( cash reserve ratio, or the amount banks are expected to park with the RBI) and SLR ( statutory liquidity ratio, or the amount banks are expected to maintain before providing credit) would have persuaded them to stay away.

"The goals of the regulator are very clear," says Akeel Master, head of financial services at KPMG. "The RBI wants to take banking to the unbanked and the rules are same for everyone. If a particular sector feels it is tough for them, they should talk to the RBI," he adds. Master says that there is no merit in pointing out that this time around the norms are tougher; they had to be considering that the last two times the RBI gave out licences was in the early '90s and 2004. "Policies have evolved since then," he adds.

In the Fray

There are large conglomerate-backed entities like Aditya Birla Nuvo, L&T Finance and Reliance Capital in the fray. The last named has roped in two Japanese partners in Mistui Trust Bank and Nippon Life Insurance. Financial services players like India Infoline, Edelweiss Capital and Religare have also thrown their hats into the ring. There is also India Post, with its huge countrywide network of post offices and deposit mobilisation machinery which, in many ways, places it ideally to roll out banking services.

Once the winners are announced, it may not be as if the failed applicants will throw in the towel. In fact, they may well pursue a go-ahead from the central bank for an alternative entry into the banking — via the inorganic route. Sudip Bandyopadhyay, who heads Destimoney Securities, feels that many of the private players who will not be allowed will later petition the RBI to allow them to acquire existing banks. "If the RBI allows new banks, there can't be justification for not allowing takeovers. Taking over an old existing bank may be a better strategy," he says.

Bandyopadhyay points out that the condition of having a fourth of one's branches in rural areas will slow down the road to profitability; breakeven will take at least a decade. "Promoters will have to dilute their equity at a time when their entities will not be fully profitable. The RBI should have allowed 15 years for promoters to dilute their stakes," he says.

One of the RBI's conditions is that applicants should promote the bank through companies in which there is a 51% public shareholding. These companies will have to promote a non-operative financial holding company, which in turn will hold the bank. That is the reason why the Singh brothers have chosen to bring down their stake to 49% in Religare Enterprises. The guidelines state that the banks have to be listed within three years.

Tough Going

Non-banking finance companies ( NBFCs) may find the norms particularly challenging, with the RBI in no mood to give them more time to meet the CRR and SLR conditions. The banks have to meet the CRR and SLR conditions at the time of starting operations. Theoretically, those angling for licences have two years to meet CRR and SLR norms as the licensing process will take six months; and an in-principle approval to start within 18 months. The current CRR is 4% and SLR is 23%.

Ashvin Parekh, Ernst & Young's national leader for global financial services, points out that the CRR and SLR norms will force new banking licensees to find new funds to park with the RBI (CRR) and in gold or government securities (for SLR) from day one. Benefits of having a bank will come from the 2% lower cost of funds that will accrue when a bank will raise low-cost deposits from its customers.

Parekh reckons that a Rs 30,000-crore NBFC will be able to offset the initial cost of meeting the norms only once it succeeds in raising at least Rs 12,000 crore of low-cost deposits. That won't happen in a hurry, particularly when a fourth of your branches are in rural areas.

However, one large NBFC happy to play with these rules is Srei Infrastructure Finance Ltd. Says Srei chairman Hemant Kanoria: "We submitted our application on June 27. Now it is in the hands of the RBI." Srei has drawn up a business plan to have 60-70% of its branches in rural areas starting with eastern and northeastern India before moving in for a pan-India footprint. Kanoria refutes Bandyopadhyay's assertion that rural branches can be a drag. "We have studied the viability of these branches very well. There is a lot of money in rural India — otherwise how do so many chit funds survive," he asks.

"We have been working in the rural areas for the past 24 years and we are the specialists. We have the Sahaj project in rural areas where many of our partners are already banking correspondents and sell financial products," adds Kanoria.

One of the biggest fears revolving around corporations foraying into banking is that group companies would be putting their hands into the till. The RBI decidedly nixed that opportunity earlier. As the CEO of the financial services business of a widely diversified group puts it: "I am not disappointed at all [that lending to group companies will not be allowed]. This is good." He's got his eyes fixed on another opportunity that he considers more lucrative: selling the conglomerate's financial products and related services to the bank's customers. That indeed makes strategic sense.

Source: EconomicTimes


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