Banking licences: Question of earnestness

Now that the Reserve Bank of India (RBI) issued clarifications on new bank licences — in response to the 443-odd questions it received from 34 potential applicants — one thing has emerged very clear that the banking regulator will not make any relaxations with regard to cash reserve ratio (CRR) and statutory liquidity ratio (SLR).

With these clarifications running into 165-pages issued last week, the central bank indeed makes an attempt to assist potential applicants in understanding the terms of the guidelines. Although clarifications are specific to the queries, RBI says that it must be read in the overall context of the guidelines.

Simply put, RBI is now telling prospective applicants that only very serious players are welcome. Meaning only those who want to be a player in the long-term, willing to put risk in the game and really make huge capital provisions. That apart, the banking regulator also made it clear that the track record of all group companies for 10 years, including non-financial ones, would be considered while granting the applications.

If at all RBI has eased a bit that is in giving more time of 18 months instead of the earlier 12 months to aspirants for setting up new banks once they secure approval, which is crucial for adhering to the apex bank’s mandatory holding structure — a wholly-owned Non-operative Financial Holding Company (NOFHC) which in turn will float a bank. However, the deadline for receiving applications from potential aspirants remains unchanged at July 1, 2013.

51 per cent of the voting equity shares of NOFHC has to be held by companies in the promoter group, while public holding in these companies should be no less than 51 per cent of their voting equity. RBI sees that the newly set up banks will have time ranging between 33 and 37 months from the grant of in-principle approval, to achieve the priority sector lending targets such as agriculture, micro credit, education, housing, micro & small enterprises and weaker sections.

Why more banks?

Effectively, the government wants more banks to expand banking services in Asia’s third largest economy, where around 40 per cent of the adult population does not have access to such facilities. In the first round of license issued in 1993, when the capital requirement for new banks was Rs 100 crore, 10 private banks came up such as Global Trust Bank, HDFC Bank, UTI Bank (now known as Axis), Bank of Punjab, IndusInd Bank, Centurion Bank, IDBI Bank, Times Bank and Development Credit Bank.

In 2001, RBI fixed the initial capital at Rs 200 crore to be raised to Rs 300 crore in three years. And in 2003-04, two more banks were issued licences — Kotak Mahindra Bank and YES Bank. Subsequently, some of these got merged with both public and private sector banks. For instance, Times Bank got merged in February 2000 with HDFC Bank in what is then touted as the first of friendly mergers in the country’s banking history, that too by swapping shares.

Later, Global Trust Bank got merged with PSU lender Oriental Bank of Commerce as the former caved in to the burden of non-performing assets owing to its exposure in the stock market. Bank of Punjab was acquired by Centurion Bank in June 2005 to form Centurion Bank of Punjab and three years down the line, in May 2008, HDFC Bank gobbled Centurion Bank of Punjab. Observers in the banking industry say that if at all the private banks’ foray, has only made them (PSU banks) more aggressive in product innovation and customer retention by improving services. What’s more? PSU banks have not caved into the technology-savvy modern private banks, instead they have learnt from them and even got better.

 Also, the government’s decision to list state-run banks when it opened up sector for private sector only made the former more resilient.

“RBI’s purpose is becoming clearer now. They want to open branches in unbanked areas and that has its own cost inflation implications. So, the applicants who apply now will have to look at these aspects very clearly,” noted State Bank of India Chairman Pratip Chaudhuri in response to the apex bank’s clarification on new bank guidelines.

Echoing similar lines, Rajesh Dedhia, Director, Vantage Institute of Financial Markets, said that “a new set of banks will only beef up and expand the industry while adding to the resilience of state-owned banks. In fact, more and more banks should come up, it does not matter if few falter and fade away in the process.”

Profitability will apparently be an issue initially running these banks creating 25 per cent branches in rural and unbanked areas. Going by the past experience, most banks, most of the time, were not meeting targets under the priority sector.

RBI could not delicence them, because they are in the industry for two years or so. When you analyse some of the clarifications issued by RBI, it only suggests that they are very serious this time. In this context, SBI’s Chaudhuri says, “As a regulator, RBI has been one of the very efficient ones and they carry certain penal provisions with them which they exercise very exceptionally and very rarely... nobody, however, stops them from exercising those powers.”

RBI clarifications very clearly spelled out that the non-banking finance companies (NBFCs) will not get any benefit as they will have to comply with CRR, SLR requirements on day one and transfer their entire lending book to the bank itself. In short, they cannot operate the NBFC and run the bank separately.

The mandate to have 25 per cent branches in rural area may not pose much of a problem for entities because they see it as part of their business plan.

“We have been doing the business of financial inclusion much before the government started it,” said Shriram Capital director G S Sundararajan adding that the compulsion of maintaining CRR, SLR will not be an easy task for any NBFC within stipulated timeline.
Regulatory forbearance on liquidity requirements has dampened hopes of many NBFCs which had plans of converting to banks like Shriram Group and IDFC to mention a few.

To the uninitiated, forbearance is basically about lender’s decision not to exercise a legally enforceable right against a borrower in default, in exchange for a promise to make regular payments in the future. For example, a mortgage lender will agree not to initiate foreclosure proceedings against a mortgager whose loan is in arrears.

But some of them (NBFCs) seem undeterred with the forbearance factor and pursuing their plans of conversion to banks with vigour.

 In the meantime, Deccan Herald, after interacting with experts in Mint Street and analysts in D-Street, has tried to second-guess who could be the dozen potential candidates (see chart) in the third set of licence to be issued by RBI? More players definitely means more competition, and in turn, more benefit to consumers like what was witnessed in telecom sector, aviation and automobiles, to mention a few.