New Banking licence Norms
RBI released draft guidelines for licensing of new banks in the private sector this afternoon, which should have actually been out by 31st March 2011, as per the FM’s budget speech. Nevertheless, broad pointers of the guideline, which is now open for discussion on public platform till October 2011, seem quite liberal, to say the least.
The draft guidelines include the following:
1. Eligibility criteria:
• Diversified private sector ownership with successful track record of at least 10 years
• Entities / groups with 10% and plus income or assets or both from either real estate construction and / or broking (capital market) activities individually or taken together in past 3 years ineligible
• Promoter groups having 40% or more assets or income from non-financial business required to meet additional rules which have not been stipulated in the current draft.
• Existing NBFCs, those eligible, can either promote a new bank or convert themselves into banks.
2. Corporate structure to be necessarily of a wholly owned non-operative holdco which is to be registered with RBI as a NBFC and will house the bank and all other financial companies in the promoter group. Recently listed L&T Finance Holdings follows such a holdco structure.
3. Minimum capital requirement has been reduced to Rs. 500 crore, from the earlier recommended Rs. 1,000 crore in the draft guidelines of August 2010, probably to facilitate wider participation.
4. Shareholding:
• Foreign shareholding restricted to a maximum of 49% for first 5 years, after which it will be as per extant policy. Current FDI / FII limit in banks is a maximum of 75%.
• Holdco shall hold minimum 40% of bank’s paid-up capital for 5 years from the date of licensing. Shareholding in excess of 40% to be reduced to 20% within 10 years and to further 15% within 12 years from date of licensing of the bank.
• Bank to get listed on stock exchanges within two years of licensing.
5. Corporate governance: At least 50% of the directors of holdco to be independent, which is similar to existing banking norms.
6. Business model to be viable and achieve financial inclusion. Must open at least 25% branches in unbanked rural centres with population less than 10,000 as per 2001 census. This clause is likely to push back the break-even of banks by about 5 years, indicating RBI’s intention on opening the banking sector for only strong committed hands with deep pockets. With this, RBI is again laying stress on the fact that only serious long-term private sector players (similar to life insurance business) are allowed to enter the already competitive banking space.
7. Bank’s exposure to any entity in promoter group not to exceed 10% and aggregate exposure to all entities in the group not to exceed 20% of bank’s paid-up capital and reserves. This is quite a regular lending caveat which is applicable even to NBFCs presently.
So the mute question is which companies / groups are in and which have been clearly debarred from the eligibility by these latest draft guidelines.
Earlier strong contenders (having even expressed keenness to acquire license) such as Singh brothers of Religare and Indiabulls are clearly out of the fray. So also, broking firms like Edelweiss has been shown the red signal for now. Probably these groups can look to enter banking through the inorganic routes at the later stage, but are clearly out of the licensing race.
Although gold loan companies like Muthoot and Manappuram Finance seem to be eligible and may be contenders, they are not likely to be awarded licenses by RBI. Ditto for Ajay Piramal. Likewise, LIC Housing Finance may not be included as it is government owned and the current guidelines show RBI’s interest in awarding license to private sector alone. Hence, IFCI also does not look quite likely.
On the other hand, Bajaj Finserv, L&T (through L&T Finance Holdings), Mahindras, Shriram group, SREI Infra emerge well qualified. Other corporate bigwigs such as RIL, Tata Group, Aditya Birla Nuvo (Aditya Birla Money is insignificant vis-à-vis the group’s size), ADAG, Kishore Biyani’s Future Group, South-based Sundaram Group, Anil Agarwal’s Vedanta (had previously bid for IFCI) will all be strong aspirants.
Finally, the licenses may be awarded by RBI selectively, keeping region-wise presence / footholds in mind – North, South, East, West. Although there may emerge about 25 aspirants (as enlisted above), nevertheless, not more than 5 licenses are likely to be awarded by RBI in this round of new banking licenses, the last awarded one being in May 2004 to Yes Bank. This latest announcement should increase the market value of stocks by not more than Rs. 1,000 crore in market cap.
Keep an eye on these names as the new baking license story unfolds in the days to come.
