Mumbai: The passing of the Banking Laws (Amendment) Bill 2011 by Parliament on Tuesday has put new bank licences back in the spotlight.
“This Bill will expedite new banking licences, but we are yet to take a call on giving licences to companies,” RBI deputy governor K.C. Chakrabarty said on the sidelines of an event on financial inclusion in Mumbai on Wednesday.
Analysts, however, said the passing of the Bill leaves no room for doubt that non-banking financial companies (NBFCs) such as L&T Finance Holdings Ltd, Mahindra and Mahindra Financial Services Ltd, Bajaj FinServ Ltd and Shriram Transport Ltd would be up for licences.
Whenever they are issued, the licences will be the first since 2003 when Kotak Mahindra Bank Ltd and Yes Bank Ltd got them.
The Mahindra Group, the Shriram Group, the Bajaj Group and L&T Finance Holdings have a large book size of Rs.20,000-50,000 crore each and would like bank licences to diversify their loan book, said Rajat Rajgarhia, director, research, Motilal Oswal Financial Services Ltd.
“Till the time they operate as an NBFC, they remain specialized players so they just concentrate on one or two segments. But to grow beyond a point, they would need multiple products in their portfolio,” he said in a note on Wednesday.
Angel Broking Ltd analysts Vaibhav Agrawal and Sourabh Taparia said L&T Finance is the “most eligible” among companies wanting to get a bank licence. “It (L&T) is not a promoter-driven corporate and has the requisite financial strength and corporate stature to promote a bank, in our view,” they wrote in a note late on Tuesday.
The passing of the banking Bill was a precondition set by RBI before issuing new licences. The Bill gives the central bank special powers to supervise lending to group companies. But, more importantly, it allows RBI to supersede private sector bank boards and make changes that can last for a year.
Without such powers, there’s little RBI can do other than appoint its own representative on the board of a bank as an observer if there are serious compliance issues.
For private banks, the Bill also makes voting rights proportional to the shareholding, removing the 10% cap on voting. For public sector banks, the cap on voting rights has been raised to 10% from 1%.
RBI will choose only the “best and the brightest” from the applications, said Shinjini Kumar, director at consulting and auditing firm PricewaterhouseCoopers.
“Between the last time when the licences were issued and today, there have been a variety of changes in the economy and there are a lot more experienced contenders. RBI on its part will choose only the best and the brightest from the applications,” Kumar said.
Santosh Singh, an analyst at Espirito Santo Securities, said some large groups may lose out because of significant exposure to the brokerage business or because their shareholding is too concentrated.
“Tata Sons, for example, owns more than 90% shares in Tata Capital. Companies like India Infoline and Edelweiss are anyway not eligible because of their broking exposure,” he added.
In draft guidelines released in August 2011, RBI had said that firms that have 10% or more exposure to the real estate and brokerage businesses in terms of income or assets will not eligible to set up a bank. Also, a corporation or an NBFC will need a “diversified ownership, sound credentials and integrity”, and a 10-year track record, though it did not clarify on what it meant by diversified ownership.
Companies, though, are ready and waiting for RBI to issue final guidelines. “We are in principle interested to apply (for a banking licence) and are okay according to RBI’s draft guidelines. We are just awaiting the final norms,” said Arun Duggal, chairman, Shriram Capital Ltd.
Shriram Capital is the main promoter of two listed companies of the group—the truck financing company Shriram Transport Finance Co. Ltd and retail finance firm Shriram City Union Finance Ltd, which serves low-income groups.
The Aditya Birla Group is another the corporate group in the running for a banking licence. Ajay Srinivasan, chief executive of financial services, said a banking licence is the next step for the group.
“We are a large non-banking company and qualify to apply, according to RBI guidelines. We are just waiting for the final norms,” Srinivasan said.
Analysts are also expecting new licences to start a round of mergers and acquisition, especially involving old private sector banks.
“We think there is a high possibility that many of the new banks could consider acquiring ‘older, smaller banks’ with large distribution networks, such as Karnataka Bank, Federal Bank, etc., especially given that they may need to have at least 25% of their branches in unbanked areas. The key would be managing the fragmented ownership of many of these banks,” Rajeev Varma and Veekesh Gandhi, analysts with Bank of America-Merrill Lynch, said in a note on Tuesday.
The process of granting new licences is widely expected to take at least another year if not longer.