By Tushar Shah
When Reserve Bank of India invited applications for new banking licences earlier this year, it was surprising to see the mixed response from both, Indian private and public sector organization. Along with the presence of mammoth private organizations like L&T Finance Holdings, Aditya Birla Nuvo Limited and Bajaj Finserv, surprisingly there were various other public sector organizations that joined the league of getting banking business on their visiting cards. Those brand names include India posts, Tourism Finance Corporation and LIC housing finance limited.
First time when Reserve Bank of India opened its banking license window in 1992, it received as many as 154 applications out of which only 10 could manage to get banking licences which included todays successful bankers ICICI bank Limited and HDFC Bank Limited. Later after 10 years when it again invited the application, it received again more than 100 applications out of which only two could make the final cut, which includes Yes Bank and Kotak Mahindra Bank. Looking at such big number of applications in the past, it is indeed surprising to see only 26 applications this year. So which are the terms and conditions of Indias Central Bank that is holding Indian giants from applying from new banking licences which would essentially give them an access to cheaper funds?
What is takes to qualify?
There are various salient features attached to new banking licence guidelines floated by Reserve Bank of India. Prominent among them are quoted below:
The organizations, which aspire to get new banking license, shall have to put aside paid up equity capital of Rs. 500 crore on the very first day itself.
1) Entities both from private and public sector shall be eligible to set up the bank through a wholly owned non operative financial holding company.
2) NOFHC, so formed, should hold a minimum of 40 per cent of the equity capital of the bank with a lock-in period of five years, to be brought down to 15 percent within 12 year from that onward.
3) No dispensation on maintaining CRR, SLR and priority sector lending. This guideline would essentially make it difficult for NBFC to make their way through.
4) Over and above this, atleast 25% branches must be in rural unbanked areas, with population 9,999, to ensure the financial inclusion initiative of RBI. This is the aspect which gives an edge to India Post as it has the last mile penetration ranging over length and breadth of India.
5) It would also evaluate the track record of promoters for at least last 10 years, which would essentially give an edge to reputed conglomerates like L&T Finance Holding, Aditya Birla group, Reliance Capital Limited, Tata Sons limited etc.
6) RBI also mandates NBFCs to transfer financial business to new company which not would make all the NBFCs comfortable to comply with.
7) Holding company fulltime executive cannot be CEO, MD of the new bank. This mandate makes it essential for the management of holding company to being the talent hunt expedition for their new bank. Interestingly JM financial tactfully announced well in advance that in case if it wins new banking license then former Citigroup CEO Vikram Pandit would be non-executive chairman of JMs banking arm.
8) The NOFHC and the bank shall not have any exposure to the Promoter Group. The bank shall not invest in the equity / debt capital instruments of any financial entities held by the NOFHC. Also Holding company cannot do the business that a bank is allowed to undertake. Trust or LLP cant hold voting equity directly in the holding company.
9) Pressure on new banks to achieve priority sector lending of 40%.
Beyond horizon
When banking sector is tremendously growing inspite of challenging operational environment and government wants to reach out to the unbanked population, lower number of applications for new banking licences ignites the underlying arguments and causes. Various critical factors like downgrading of Indian economy by renowned rating agencies, current account deficit pressuring local currency, weakening investment sentiments and stricter banking norms laid down by RBI are all more or less the prime reasons behind lesser participation in applying for the new banking license. Hence it will not be cakewalk for new banks to establish themselves and create business for themselves when compared to the then new banks who entered during the budding liberalization era.
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