New Banking Licence Hopefuls-VRK100-10Jul2013

Rama Krishna Vadlamudi, HYDERABAD   10 July 2013
www.ramakrishnavadlamudi.blogspot.com

The deadline for applying new banking licences ended on 1 July 2013 and later in the day the Reserve Bank of India (RBI) released a list of 26 aspirants (table given below), who have applied for new bank licences as per RBI’s final guidelines dated 22 February 2013. It may be recalled that the process of issuing new bank licences began when the then finance minister made an announcement in his budget speech of 2010-11. In the last two decades, RBI issued 12 bank licences in the private sector—10 in 1993 and another two in 2001. Some of these banks are Axis Bank, HDFC Bank, ICICI Bank, IndusInd Bank, Kotak Mahindra Bank and Yes Bank. Read on to know banking licence hopefuls:

RBI’s Guidelines for New Bank Licences:

The main features of the eligibility criteria for applying new bank licences, in terms of RBI’s guidelines of 22Feb2013 are:

ü  The minimum capital required for a new bank is Rs 500 crore

ü   Entities/groups in the private sector which are owned and controlled by residents are eligible to promote a bank through a wholly-owned non-operative financial holding company (NOFHC)

Ø No individual shall hold more than 10% stake in the wholly-owned NOFHC

Ø The public shareholding in the promoter group companies shall not be less than 51% of the total equity capital of the NOFHC

Ø The NOFHC shall hold the bank as well as all the other financial service companies of the group regulated by RBI or other financial regulators

Ø The NOFHC will be registered as an NBFC with the RBI

ü    Non-banking financial companies (NBFCs) are also eligible to apply

ü  Promoters should be ‘fit and proper’ to promote a bank as per the RBI guidelines—which emphasize on promoters’ past track record, clean business culture, etc.

ü The bank shall maintain a minimum capital adequacy ratio of 13% of its risk-weighted assets for a minimum period of three years

ü   The bank shall gets its shares listed on stock exchanges within three years of the commencement of the business

ü   The aggregate holding of the FDI, NRIs & FIIs in the new banks shall not exceed 49% of the paid-up equity capital for the first 5 years from the date of licensing of the bank

ü   The bank shall open at least 25% of its branches in rural centres (with a population of less than 10,000)

The List of Applicants:

A total of twenty-six entities/groups have applied for new bank licences:

1. Aditya Birla Nuvo Ltd	10. INMACS Mgmt Ser	19. Shriram Capital Ltd
2. Bajaj Finserv Ltd	11. Janalakshmi Fin Ser	20. Smart Global Ventures Pvt. Ltd
3. Bandhan Fin Ser Pvt	12. J M Financial Ltd	21. SREI Infra. Finance Ltd
4. Department of Posts	13. LIC Hsg. Finance Ltd	22. Suryamani Fin. Co. Ltd
5. Edelweiss Fin. Ser. Ltd	14. L & T Fin. Holdings Ltd	23. TATA Sons Ltd
6. IDFC Ltd	15. Magma Fincorp Ltd	24. Tourism Fin Corp of India Ltd
7. IFCI Ltd	16. Muthoot Finance Ltd	25. UAE Exc & Fin Ser Ltd
8. Indiabulls Hsg. Fin. Ltd	17. Reliance Capital Ltd	26. Value Industries Ltd
9. India Infoline Ltd	18. Religare Enterprs Ltd

Compared to the previous round, the number of applicants this time is fewer due to stringent set of new guidelines issued by RBI. The Mahindra Group opted out of applying saying that the guidelines were too onerous. Applicants from industrial groups are Aditya Birla Nuvo (Aditya Birla group), Bajaj Finserv (Sanjiv Bajaj), L&T Financial Holdings, Reliance Capital (Anil Ambani group), Tata Sons and Value Industries (Videocon group). Smart Global Ventures belongs to BK Modi group and Suryamani Financing is floated by Pawan Ruia.

Government-owned or semi-government related entities, such as, Dept. of Posts, IDFC Ltd, IFCI Ltd, LIC Housing Finance and TFCI have also applied for licences. NBFC applicants include: Indiabulls Housing Finance, Magma Fincorp, Muthoot Finance, Shriram Capital and Srei Infrastructure Finance.

And then there are brokerage houses such as, Edelweiss Financial Services, India Infoline JM Financial and Religare Enterprises. Bandhan Financial Services and Janalakshmi Financial Services are micro financial institutions. Adity Birla Nuvo, Bajaj Finserv, IDFC, IFCI, LIC Housing Finance and L&T Financial Holdings are NBFCs.  

The Future Course of Action from RBI:

 Now that twenty-six applications have been received, the RBI would first screen all the applications based on ‘fit and proper’ criteria and various other factors; and thereafter the applications will be referred to a High Level Advisory Committee to be set up by RBI. Based on the recommendations of the Committee, the RBI will take a final call on issuing in-principle approval for setting up a bank. RBI’s discretion in this regard will be final.

The entire process may take another five to seven months before new banking licences are issued. RBI will take its own time in issuing fresh licences. The validity of the in-principle approval issued by RBI will be 18 months from the date of granting in-principle approval and would thereafter lapse automatically.

How Many Licences?

All eligible entities will not be issued licences, says RBI. When asked how many licences would be issued, RBI governor D Subbarao and Union finance minister P Chidambaram claim that they don’t have a number in mind. It would be a pleasant surprise if RBI issues more than six or seven licences.

Why is So Much Interest Around New Bank Licences?

Banks have large impact on every section of the society. Their reach is enormous. With small amount of capital, they can achieve large scale of operations. With financial inclusion and direct benefit transfer becoming buzzwords in the political economy, banks are poised to play a more important role in India, covering all the nooks and corners.

On the other hand, banking sector has achieved a bad reputation following the Lehman Brothers collapse, Libor rate-fixing scandal and various other scams in the last several decades. The greed of Wall Street bankers in the past decade had almost destroyed the real economy. Banking system is too powerful and too complex and handling it has become very difficult for central bankers and political masters around the globe.

During 1960s, there were instances of promoters of Indian private sector banks misusing public money for private purposes. India has its own share of bank collapses too, the most prominent being Global Trust Bank (2004) in recent memory.

What are the Likely Candidates?

Keeping the mischief a bank can play with public money, RBI will be very selective in giving licences. RBI would be extremely cautious is evaluating the past track record of promoters or promoter groups. It would be vary of granting licences to promoters whose credentials are suspect or dubious.

RBI has to satisfy different constituencies while selecting the final list. One curious applicant is Dept. of Posts. I doubt whether they’d get a licence. While it is difficult to speculate who will be the final winners, I would guess the following entities are likely to get banking licences from RBI: Aditya Birla Group, Bajaj Finserv, IDFC Ltd, LIC Hsg. Finance, L&T Fin. Holdings, Shriram Capital, Srei Infrastructure Fiance and Tata Sons. Of course, look for some surprise winners and exclusions in the actual list!

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Abbreviations: FDI-Foreign Direct Investment; FII-Foreign Institutional Investor; NRI-Non-Resident Indian. Reference: RBI’s guidelines on new bank licences. Disclaimer: The author is an investment analyst and freelance writer; and has a vested interest in the stock markets. This shall not be construed as an investment advice. The author’s articles on financial markets can be reached at:

http://ramakrishnavadlamudi.blogspot.in/