Mumbai: The Reserve Bank of India (RBI) may set aside reservations on real estate firms and brokerages and allow them to apply for bank licences when it formalizes its final guidelines later this month, according to two persons familiar with the development, but there is no certainty that such entities will get the final nod.
In its draft guidelines, released in August 2011, RBI had said companies with an exposure of 10% or more to real estate and brokerage businesses by revenue or assets cannot seek permits to enter India’s Rs.70 trillion banking sector, practically making most of the realtors and brokerages ineligible to apply.
Voicing its concerns, RBI had said that “past experience with brokers on the boards of banks has not been satisfactory”, and it is, therefore, “necessary to ensure that any entity/group undertaking such activities on a significant scale is not considered for a bank licence”.
Realtors and brokerages, in their discussions with the regulator, protested such a move and demanded they should be considered since banks can dabble in broking and give loans to builders. The government too wants the central bank to change its stance. The government is of the view that it is improper to generalize that “all real estate firms are bad or all brokerages are good”, a government official said in Delhi. He did not want to be named.
This has prompted RBI to lower its guard against brokerages and realtors.
According to the two people quoted above—neither of whom was willing to be identified, considering the sensitivity of the issue—RBI will now let all corporate aspirants to claim stakes to float a bank, but be stricter in its approach to ring-fence the banking system from any possible intervention by the promoters in the banks’ running and misuse of public money.
This will be good news for some of the banking aspirants, including brokerage India Infoline Ltd, which has been lobbying hard to get into the banking business. “If banks can do broking, why can’t brokerages be allowed to float banks?” asked Nirmal Jain, chairman of India Infoline. “We have a large network of branches and experience in the financial services space, which makes us an eligible contender to operate in the area of financial inclusion.”
Religare Enterprises Ltd, another brokerage, also wants to apply for banking licence.
Other companies in the fray include L&T Finance Holdings Ltd, Aditya Birla Financial Services Group, Mahindra and Mahindra Financial Services Ltd, LIC Housing Finance Ltd, Shriram Transport Finance Co. Ltd, Bandhan Financial Services Pvt. Ltd, Tata Capital Ltd, Muthoot Finance Ltd, IDFC Ltd, Reliance Capital Ltd, India Infrastructure Finance Co. Ltd, India Infoline Ltd, Bajaj Finserv Ltd and SKS Microfinance Ltd.
“Current view of RBI seems to suggest that these two businesses are not eligible for banking licences. Hence, there needs to be an independent evaluation before a final decision can be taken in this regard,” said Akeel Master, head of financial services, KPMG India, a consultancy.
The apex bank has been extremely reluctant to allow corporate houses to float banks, given a choice.
“We are painfully aware of the pitfalls, but we will make sure that regulations are not subverted,” deputy governor Anand Sinha had said in October in Pune at a seminar.
The Indian central bank has been maintaining that it will not start the process of issuing new bank licences unless the Banking Regulation Act is amended to give RBI powers to supersede the boards of banks and control to inspect group companies of the promoter of a new bank.
The government has addressed the central bank’s concerns by amending the banking law and empowering the central bank to dismiss a board and appoint an administrator to run a bank for up to one year.
Following the nationalization of 14 large banks in 1969 and six in 1980, RBI has so far given licences to only 12 banks in two phases, including conversion of a cooperative bank into a commercial bank.
In the past, the apex bank’s stated objective behind giving licences to new banks was to introduce competition in the banking sector, which was largely dominated by government-owned banks.
This time, the focus is on the so-called financial inclusion, or increasing the reach of financial services to the unbanked population in the country. At least 40% of India’s adult population does not have access to banking services.
RBI has not allowed private corporations in the past to float banks except in one case where a corporate group secured licence even though technically it was given to a group of non-resident Indians belonging to a particular community.
In the first round, RBI issued licences to 10 private sector banks in 1993-94, shortly after the nation embraced economic liberalization under the P.V. Narasimha Rao government.
These were Global Trust Bank Ltd, ICICI Bank Ltd, HDFC Bank Ltd, Axis Bank Ltd, Bank of Punjab, IndusInd Bank Ltd, Centurion Bank, IDBI Bank Ltd, Times Bank and Development Credit Bank Ltd.
From the first lot, Times Bank was merged with HDFC Bank in February 2000—the first so-called friendly merger in India’s banking history and also the first that was done by swapping shares.
Global Trust Bank was forced to merge with Oriental Bank of Commerce in August 2004 after the Hyderabad-based bank crumbled under the burden of bad assets because of its exposure to stock markets.
Bank of Punjab was acquired by Centurion Bank in June 2005 to form Centurion Bank of Punjab. Three years down the line, in May 2008, HDFC Bank took over Centurion Bank of Punjab.
ICICI Bank, HDFC Bank and Axis Bank (formerly UTI Bank), promoted by financial institutions, have emerged as the top three private banks in the country.
ICICI Ltd, the project finance institution that promoted ICICI Bank, was merged with the bank in 2002. Industrial Development Bank of India (IDBI) too followed the path of ICICI and merged itself with IDBI Bank in 2004.