Who will float the next private bank in India? Infrastructure Development and Finance Co. Ltd (IDFC) won’t. IDFC managing director and chief executive Rajiv Lall told TV channels on Tuesday that he would not apply for a banking licence and is happy operating in the non-banking space.
IDFC seems to be an exception among non-banking finance companies (NBFCs) as almost every firm in this space and many Indian corporations are keen to float banks after finance minister Pranab Mukherjee last week said the country’s banking regulator is considering giving new banking licences to private sector companies and NBFCs could also be considered, if they meet the Reserve Bank of India’s (RBI) eligibility criteria.
Also Read Tamal Bandyopadhyay’s earlier columns
RBI opened doors for private firms in the banking space in 1993; in 2003, it had allowed two more to set up shop. Applications for banking licences from some Indian corporations have been lying with RBI for 17 years or so and they will have to make fresh requests if they are serious about their intentions.
Atul Kumar Rai, managing director and CEO of India’s oldest financial institution, IFCI Ltd, has said his organization would be a contender. There are others too, such as Srei Infrastructure Finance Ltd, Religare Enterprises Ltd, Shriram Transport Finance Co. Ltd, L&T Finance Ltd, Bajaj Finserv Ltd, Indiabulls Financial Services Ltd, Birla Capital and Financial Services Ltd, Tata Capital Ltd and Reliance Capital Ltd, to name a few.
The ambition of the Birlas, Tatas and the Reliance-Anil Dhirubhai Ambani Group (R-Adag) is well known. At one point of time, the Tatas wanted to acquire 10% stake in UTI Bank Ltd (the earlier avatar of Axis Bank Ltd), but the group junked the idea after it failed to get an assurance from the banking regulator that corporations would be allowed to own a bank in due course. Under the existing guidelines, the ownership of a bank has to be diversified and no entity can own more than 10% in a bank.
R-Adag boss Anil Ambani has on many occasions said that his group wants to own a bank as soon as the country’s regulations allow for it.
Yet another strong contender is Sahara India Financial Corp. Ltd, India’s biggest residuary NBFC, which was barred by RBI in 2008 from taking deposits from the public. Initially, RBI asked it to wind down its operations by 2011. After several meetings with Sahara, RBI set a three-year sunset window on Sahara India Financial, allowing it to accept fresh deposits maturing until 30 June 2011. Sahara India will have to repay the deposits when they mature and bring down the aggregate liability to depositors to zero on or before 30 June 2015.
A banking licence allows a corporation to raise cheap money from the public. Besides, no other business is as leveraged as banking, as for every Rs9 worth of capital, banks can build Rs100 worth of assets. Some aspirants have informally started lobbying with the ministry and RBI, but the latter is expected to go slow on this. Before issuing any fresh licence, it may review existing norms and this will take about two years. In other words, the fresh set of new banks is unlikely to start operations before fiscal 2013. The last time?RBI fine-tuned the ownership norms of private banks was in 2004. At that time, it raised the minimum capital requirement to float a bank from Rs100 crore to Rs300 crore and focused on the so-called fit-and-proper criterion for the ownership.
The minimum capital requirement is expected to go up further, but that would not pose as an entry barrier for most of the aspirants because they have high capital and reserves. For instance, Reliance Capital’s net worth, or capital and reserves, is Rs6,806 crore, that of Shriram Transport is Rs2,292 crore and Bajaj Finserv’s Rs1,205 crore.
RBI is also expected to prefer NBFCs with diversified holdings. If indeed that happens, firms such as L&T Finance will have an advantage over others. In 1993, when India first opened up the banking sector to private firms, the objective was to infuse competition. To a large extent that has been fulfilled, as the so-called new generation private banks such as ICICI Bank Ltd, HDFC Bank Ltd and Axis Bank have forced India’s staid public sector banks to become more nimble-footed. But these banks have not been able to spread banking across the country as their focus has all along been on urban India.
Under the regulation, all banks need to set up at least one branch in rural and semi-urban India for every three branches in urban India, but these banks are not excited about the business prospects in rural India. Similarly, under the licensing norms, they needed to have their registered office outside the metros. Indeed, they have their registered offices in Pune, Vadodara and Ahmedabad and such places, but this only ensures that they hold their annual general meetings there while the business focus remains on the over-banked metros. At least one private bank has even sold its registered office in a non-metro to a public sector bank!
Some RBI officials say the metros should be declared no-entry zones for the new set of banks and they should be asked to focus only on rural and semi-urban India. But that may not work unless they are given enough incentives and regulatory forbearance such as lesser reserve requirements, etc. Former finance minister P. Chidambaram in the late 1990s mooted the concept of local area banks but they never took off in the absence of incentives.
They could be allowed in urban India as well. When competition intensifies, bank margins will be under pressure and both the new entrants as well as existing banks will be forced to reach out to rural India looking for new business. Isn’t that the best way to spread financial inclusion?
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint.
Please email comments to firstname.lastname@example.org