Mumbai: After a gap of two years, the Reserve Bank of India, or RBI, has sanctioned 99 branch licences to two private sector banks— Dhanalakshmi Bank Ltd and IndusInd Bank Ltd.
There are no restrictions on branch licensing in India but the banking regulator had held back these two banks’ branch expansion plan as they were not sticking to ownership guideline laid down by RBI in 2005.
The central bank recently issued 30 branch licences to IndusInd Bank and 66 branches to Dhanalakshmi Bank. With this, IndusInd Bank will have 210 branches and Dhanalakshmi Bank, 273 branches.
Green signal: An IndusInd Bank office in New Delhi. The bank has got approval from the central bank to set up 30 branches. Ramesh Pathania / Mint
Branches are key to a bank’s operations in India as they depend on retail deposits to build loan assets, unlike in some of the developed economies, where banks depend largely on inter-bank markets for resources. For the same reason, foreign banks want more branches in India.
According to the ownership guideline of RBI, no single entity can hold more than 10% in a bank and the net worth of a bank should be at least Rs300 crore. In February 2005, it announced these guidelines and since then it has been working with some of the relatively weaker private banks to raise their net worth. The idea behind broad-basing the shareholding pattern is to usher in better corporate governance.
Since 2007, RBI stopped issuing branch licences to Dhanalakshmi Bank and IndusInd Bank. Most recently, the regulator has stopped issuing fresh branch licences to Development Credit Bank Ltd, yet another private bank, as its promoter, the Aga Khan Fund for Economic Development (Akfed), continues to hold 25.10% in the bank, well over the prescribed level.
Besides, its financial performance is also under strain on account of high stressed assets. High non-performing assets, or NPAs, dent a bank’s profitability as it does not earn interest on such assets and, on top of that, it needs to set aside a portion of its income aside to provide for the NPAs.
Akfed has sought approval from the central bank and the Union government to hold more than 10% stake in Development Credit Bank.
As on 31 March, the Hinduja Group, the promoter of IndusInd Bank, holds 25.63% stake, down from 28.45% in March 2008.
“RBI had clubbed the Hinduja Group of companies and the Ashok Leyland Ltd holding under one group and the IndusInd International Holding Ltd (IIHL) under another group. The Hinduja Group of companies and Ashok Leyland were holding around 14%, but this has been brought down to 10% through open market sales,” said an IndusInd Bank official on condition of anonymity, citing the sensitivity of the issue.
Ashok Leyland now holds a 5.41% stake, against 8.94% in March 2008. The auto maker had held a 75% stake in Ashok Leyland Finance Ltd (ALF). Following ALF’s merger with IndusInd Bank in June 2004, Ashok Leyland had acquired a 15.3% stake in the bank.
IIHL continues to hold around 19.3%, down from 21.4% in March 2008, and it will have to bring down its stake to 10%.
“IIHL is largely made of non-resident Indian investors. It has submitted a road map to the regulator, stating its plans to reduce stake in the bank overtime,” the same official said.
“The release of branch licences after two years is a signal that the regulator now has comfort with the promoters and the bank’s business plan. We have received RBI approval to set up 30 branches and now we are applying for 140 branches,” the official added.
The bank has also received RBI’s nod to move its corporate office from Andheri, a western suburb of Mumbai, to Parel in central Mumbai.
Dhanalakshmi Bank has increased its net worth to Rs401 crore and P. Raja Mohan Rao, who was a significant shareholder in the bank, has brought his holding below 10% to 9.68% in March.
“We go and meet the regulator every 10 days and apprise it of the bank’s progress. The regulator is now comfortable with the new management and their business plan,” said Amitabh Chaturvedi, managing director and chief executive officer, Dhanalakshmi Bank.
Under the branch licensing norms, commercial banks are required to submit a one-year branch expansion plan to RBI. Private sector banks are required to ensure that at least 25% of their branches are in semi-urban and rural centres.