Mumbai: Religare Enterprises Ltd, the financial services company controlled by billionaire brothers Malvinder and Shivinder Mohan Singh, is positioning itself as a serious contender for a banking licence.
In an interview, Shachindra Nath, group chief executive of Religare Enterprises, said the company is scouting for partners in India and overseas who understand the rural market.
Nath also explains why the company should be given a banking licence, even though Religare has an exposure to the broking business and the company is not widely held, two critical criteria that the Reserve Bank of India (RBI) has set in its draft licensing norms released in August. Edited excerpts:
Why do you want to become a bank? For access to cheap money?
No, our aspiration has always been to build an integrated financial services business in India, and very gradually we have built everything that exists in financial services world, except commercial banking. Purely from a customer servicing proposition, having a bank helps all our businesses and enables us to offer better delivery.
Fresh approach: Nath says the old banks have no incentive to innovate because they are busy managing their current size, but a new entrant has the compulsion to innovate and bring down the cost of services. Hemant Mishra/Mint
You already have a non-banking finance company (NBFC) and are lending money.
It’s not about credit, it’s about servicing. If you look at the businesses that we are in, whether it’s our life insurance or asset management or retail brokerage business, having a bank allows us to help service our customers far better than what we do. The customers have to go to multiple places because all of them—whether they are in mass affluent segment or the rural segment or even large corporates—want one-stop shop for all their financial needs. A bank allows you to do that.
I don’t think it is about cheap money or deposits—it’s about achieving our aspiration of building an integrated financial services business. This would come in full shape when we have a banking service alongside it.
Also a bank will help you move up the value chain.
Absolutely. Historically most Indian banks have generated a significant amount of shareholders’ wealth. But besides that, financial services industry in India is very trust-driven because mass retail clients like to bank or deal with the firm in which they have very high trust propositions. Fiduciary businesses like banks, asset management and life insurance build credibility and trust among customers.
I don’t think our management can’t generate value for shareholders without the bank. We have done this over a period of time, but in order to get the full wallet share of all our customers, a bank is needed.
That’s what you want. But what will consumers get from you?
We already have 78 banks in the country. The challenges have been that 70% of Indian banks are technically government-owned and there is no innovation. While economy continues to grow at 8% or more and savings at 42% of GDP (gross domestic product), we see under-penetration everywhere— whether it is lending, equities or asset management. There is no innovation happening in the financial services market. The old players have no incentive to innovate because they are busy managing their current size. A new player has the compulsion to innovate and bring down the cost of delivery and services. The business is not different from what is happening in the telecom and airline industries.
You are making a sweeping statement—there is no innovation in the financial sector.
The first level of innovation has been done by the new private banks. They have been very innovative and brought the first generation of change. Again, when
Kotak (Mahindra Bank) and Yes Bank were granted licences, they had done some level of innovations. It’s very difficult for an existing large business to transform and do something unique, because the risk-reward proposition of the changes is not in their favour. I’m not saying that they have not done that; I’m saying the new people will probably do better.
We have been through 9-10 countries and seen multiple models of banking business. We have seen models where new banks have used banking inclusions and made themselves very profitable. Every bank keeps saying that financial inclusion will not be profitable. But, what I believe is that these new players can bring that innovation.
So if you get the banking licence, your focus will be on rural India, and financial inclusion will be the theme of your business.
If we get the licence, it will be a balanced business. We are not a global multinational corporation that can enter this country, make promises to regulators and policymakers, don’t fulfil them and go out. That is not possible for us as this is our home market. If the policymakers want and rightfully so that the balance 40% of the unbanked population should be banked, we would surely make that as one of the most strategic components of our business. But simultaneously, we will also make this business viable and profitable.
How will you be different from others?
I can’t get into the details of our plans as I don’t want others to replicate what we are trying to do. A lot of investment has gone into making the plan. But broadly there are three or four things that we are trying to do. We are not establishing a bank to drive the value; we are establishing it because it is core to us.
Second, the proposition cannot be built just by us. We have been looking to create a model of partnerships. A lot of people say why the founders of the banking business are being pushed to dilute so quickly. They see a loss of value. We have always believed that even if our starting point is low, then too we are happy. If someone can partner with us, then we can win, because on our own we cannot bring in new innovations, technologies, processes. We are looking globally and domestically to find right partners or people, maybe a financial set of investors, but who have access to knowledge.
As of now, you can hold a minimum of 40% stake in the bank. This means you can offer 60% to a group of partners.
We will have to see the final guidelines. Most of these partners would like to hold significantly because 5% doesn’t interest them much. For the amount of efforts and resources they would provide, they would like to capture the economic value of that. But whether it is 40% or 50%, we don’t differentiate in the business the intensity and passion about the same.
Have you started talking to anybody?
We are speaking to a lot of people, but at this point every body is waiting to see what the final shape will be. But there is a huge amount of interest, and we are not just speaking to the usual names that everybody is chasing.
What are the usual names?
All large global banks and financial institutions. I won’t name them, but all those banks that are not present in India. They have been called by almost everyone in the country. We are trying to find entities that may be relatively small, but have done something in their home market that we can bring here. Our objective is to find a set of people or organizations or institutions who can add value to the firm.
Who are you talking to in India?
We operate roughly in and around 659 cities and 2,200-odd locations. We cover almost every segment of the market—mass affluent through our brokerage platform; SMEs (small and medium enterprises) and corporates through our investment bank. One of the missing links is to go deep in rural penetration, which we don’t have except our commodity business that operates roughly around 70-80 mandi offices. We will be very open to partner with somebody who can give us the access to and understand the deep rural markets.
A microfinance institution (MFI)?
I don’t know whether MFIs today cover the entire landscape of rural market and they really understand what is the rural banking need.
Consumer goods firms?
This is a right example.
Are your talking to Hindustan Unilever Ltd and ITC Ltd?
This market is wide open and probably they might be looking at doing this on their own. But you are absolutely right. We would be very open to partner with people who have experience and expertise in understanding the large rural market because knowledge is something that can only come when we create those partnerships. It’s very difficult to replicate.
How confident you are about getting the licence?
We should be seen as a strong contender for the banking business.
You have more than 10% exposure to broking business and this disqualifies you.
Well, it’s an interpretation. More than the written words, if you go behind the intent of the guidelines, they have rightfully emphasized not on the entities, but on the promoter group. For us, the promoter group is obviously two brothers, Malvinder and Shivinder, who own the majority of our company. If you look at their group level revenue, the broking business is far less than 10%.
You are including healthcare and other businesses.
Yes, and the draft guidelines talk about the promoter group.
If we look at only Religare Enterprises, how much will be the broking business?
It will be around 13-14%. In the draft guidelines, they also have made a comment that globally proprietary trading is being excluded or extracted from the banking business. I think their worry is about those brokerages that have very significant proprietary trading that puts the risk of deposit holders’ money being used for proprietary trading and creating market risks.
The plain reading of the draft guidelines will not tell you the real intent behind them. The concern is about the brokerage business that is exposed on the proprietary trading side. The Singh family has much larger businesses than just Religare.
Your NBFC also has substantial exposure to capital market as you lend against shares.
It’s not substantial. Our NBFC is roughly around Rs.9,000 crore, of which the capital market business is around Rs.2,000-odd crore. We are the only NBFC in the country that focuses on SMEs, the growth engine of the whole economy.
So you are eminently qualified to set up a bank.
We feel confident that we are among the strong contenders because of four main criteria that RBI has put and I will go beyond that.
The Singh family has the record of building successful businesses for three generations. In the financial services world, other than Religare, there is no other entity that has so much of supervision of fiduciary businesses. Today, we are regulated by all regulators in India. We have business in 10 markets and are regulated by almost all regulators in the world. We manage around $15 billion of assets not just in India, but in one of the most highly regulated market, the US.
Two years back, we got our parent company registered with RBI and our entire business is under its supervision and also the structure is exactly what the banking regulator wants.
Religare Enterprises is probably the only financial services company, or for that matter only company, where the family owning more than 70% doesn’t sit on its board. Majority of our board of directors are independent.
To qualify for a banking licence, you need to be widely held, but the Singh brothers hold 70%.
The draft guidelines talk about the promoter group level. In fact, they want the non-operating company to be a wholly-owned subsidiary. Ours is currently not a wholly-owned subsidiary, but held majority by them. Second, a lot of our businesses have been in the incubation stage for sometime, which needs capital. Diversification of Religare Enterprises shareholding is not difficult because our businesses require significant amount of capital for all our underlying subsidiaries. The family’s stake will continue to come down over a period of time and we will start raising more capital from the market.
Is arranging Rs 500 crore capital an issue?
I think the banking licence will generate so much of interest that capital won’t be a problem for anyone.
Will you sell stake at a premium?
This business is not to get the shareholder value. Fortunately for us, we have promoters who don’t have capital constraint or capital problem and they want to generate significant value from their shareholding over a long period of time. In some of our businesses, we have not asked for any premium.
In most life insurance ventures in India, the domestic partners have either taken an upfront premium, or have done something in which the foreign partner is not a partner but just an investor. We have taken zero premium; we brought Aegon and made them partners and continue to build that business jointly.
If you get a banking licence, you would need to go to the market and list shares within two years.
What people have not probably read is that RBI has also said that existing businesses that these entities own and that can be done by the bank need to be consumed within the bank. Technically, this means if we are running an NBFC, that needs to be converted or merged into the bank. Since you will have a base of profitability and capital, I don’t think two years is a problem.
Our NBFC generates significant profit for us and if we convert that as a bank or transfer its substantial assets to the new bank, within two years the bank can get listed.
Also, I think people underplay the institutional investors and their foresight. RBI wants these firms to be listed so that their governance can be improved. Two years is short time for sure, but it’s not so short that people won’t understand and realize the value. Also, this would restrain people from driving the business just for valuation because when you list in two years, you won’t get the valuation. I think RBI wants to constrain the incentive for building it around valuation.
This is an edited transcript of an interview that was first telecast on Bloomberg UTV on Thursday.