Ownership, listing clauses to pose problems for prospective new banks, says ICRA

In a note, ICRA said the draft guidelines for new bank licences could be potentially challenging in terms of ownership and listing conditions proposed by Reserve Bank of India (RBI). Especially, criteria to bring down promoter shareholding to 40 per cent and have the bank listed on the stock exchange within two years of receipt of banking licence.

Considering that it would take some time post-receipt of licence to commence banking operations while managing teething problems, and that capital market conditions prevailing at the time may not be conducive, it said adding: “Given the proposed clamp on non-promoter shareholding, it will be difficult for the promoter to dilute its stake to 40 per cent within first two years.”

Moreover, supervision of non-financial entities (owned by same promoter) by RBI may prove difficult, it said. While welcoming stronger corporate governance structure envisaged, ICRA said it would serve to further mitigate concerns associated with the entry of corporate entities in the banking sector. However, greater clarity is required on some of the provisions, it added.

Ensuring stability

On steps aimed at ensuring stability, ICRA stated that while these criteria might make some aspirants ineligible for banking licence, the restrictions could impart stability to the proposed banks and make supervision simpler and more effective.

Further, a higher capital adequacy could offer some cushion to deposit-holders against volatilities faced by the bank during the start-up phase. Considering larger issues of financial stability and level playing field, ICRA said there may be a case for realignment of guidelines relating to capital market and real estate activities for the existing private banks; for the shareholding of existing promoters who continue to hold over 15 per cent in existing private banks; and for consolidation of operations of the existing groups that continue to operate via non-banking routes.

At the same time, the requirement of having to open branches in under-banked areas could exert pressures on the profitability of the new banks in the short term even as the stipulation could bring in some improvement on the financial inclusion front.