RBI sets bar high for banking entry

RBI sets bar high for banking entry

Mumbai: The Reserve Bank of India (RBI) on Monday said industrial houses will be allowed to set up banks, but stipulated stringent norms that may disqualify many of the aspirants as it unveiled draft guidelines for new banks in the country.

Companies that have an exposure of 10% or more to real estate and brokerage businesses in terms of revenue or assets are not eligible to seek licences to enter India’s 64 trillion banking industry. To be able to float a bank, a corporation or a non-banking financial company (NBFC) will need a “diversified ownership, sound credentials and integrity", and a 10-year track record.

The draft norms have kept the minimum capital required for new banks at 500 crore.

Those who secure in-principle approval will have to set up banks within a year and need to have capital adequacy ratio of 12% against the current 9% norm for banks.

RBI has invited suggestions and comments on the proposals till 31 October. The norms will not be ready until the government amends the Banking Regulation Act, empowering RBI to supersede bank boards in case of any serious irregularities.

Currently, India has 81 commercial banks, out of which 22 are privately owned.

“The message is clear. Only those parties that are really serious to make significant changes in the group structure will be encouraged to seek licences," said Viren H. Mehta, director at Ernst and Young India.

The groups or entities with 10% or more income or assets or both from real estate and broking activities, “individually or taken together" in the last three years, are not eligible to float new banks.

This norm may put a spoke in the wheel of many aspirants. For instance, most brokerages, including India Infoline and Edelweiss Capital, and real estate companies may not be able to seek licences.

Brokerage Religare Enterprises Ltd, however, said it has segregated and separated management for each business, and as a promoter group “income from broking business is less than 10%", and hence it is eligible to seek a banking licence.

“The draft guidelines contain a strong focus on greater financial inclusion, efficient corporate governance, adequate controls on exposure to group companies, and time-bound milestones for listing," said Sam Ghosh, CEO of Reliance Capital Ltd, another aspirant.

Gagan Banga, CEO of Indiabulls Financial Services, part of a conglomerate rumoured to be interested in starting a bank, said his group will not seek a banking licence.

Nirmal Jain, chairman of India Infoline Ltd, said RBI’s move to disqualify brokerages was “surprising" as such entities do have the understanding, capital strength and distribution network to run banks.

“Logically, many large brokerages are efficient players in the financial services industry. Showing an aversion to them is quite surprising and is not appropriate," he said.

The RBI proposal said “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".

Also, companies such as LIC Housing Finance Ltd, Power Finance Corp. Ltd and Rural Electrification Corp. Ltd, too, are out of the fray as they are government-owned entities and the new set of banks are to be owned by private firms only.

The holding company will initially have at least a 40% stake in the bank for the first five years and this will be brought down to 20% within 10 years and 15% within 12 years. The bank will be required to list itself by offering shares to the public within two years of licensing.

The foreign holding in new banks will be capped at 49%, even though current norms allow overseas entities to invest up to 74% in private banks.

Any single entity or group, however, cannot hold more than 5%.

In a bid to ensure corporate governance, RBI has proposed that at least half the directors of the holding company should be independent.

RBI also warned that it may “impose additional conditions and, if warranted, may withdraw the in-principle approval" if any “adverse features" are noticed regarding the promoters, their associated firms and the group in which they have interest.

No financial services entity under NOHC would be allowed to engage in any activity that a bank is permitted to undertake departmentally. All such activities will have to be moved to the new bank subject to respective regulations, RBI said.

“RBI will have to be satisfied that the corporate structure does not impede the financial services under NOHC from being ring-fenced, that it would be able to supervise the bank and NOHC on a consolidated basis, and that it will be able to obtain all required information from the group relevant for this purpose smoothly and promptly," it said.

In those cases where promoters have more than 40% of their assets or income from non-financial business, the exposure of the new bank to any entity in the promoter group will be capped at 10% and aggregate exposure at 20% of the capital and reserves of the bank.

Boards of such banks should have a majority of independent directors and need to seek prior approval of RBI to raise capital beyond 1,000 crore.

Analysts said the draft lacks clarity on certain aspects, such as the diversified ownership of the aspirants.

“The key thing is that RBI has not defined what is diversified ownership. In my opinion, less than 26% could suggest a probable diversified holding. In that case, very few entities, such as Larsen and Toubro, will be eligible to apply," said Vaibhav Agarwal, vice-president (research) at Angel Broking Ltd. Shriram Transport Finance Co. Ltd could be another eligible firm.

The over-arching objective behind the new set of banks is the spread of banking services, or so-called financial inclusion. RBI wants new banks to have a robust technology platform from the beginning and at least 25% of their branches in rural India. These lenders have to meet the so-called priority sector lending norms, under which they need to lend 40% of their total loans to agriculture, exports and weaker sections.

RBI kicked off the process to allow private firms to float banks after finance minister Pranab Mukherjee in his February 2010 budget announced that the apex bank was considering such a plan. In August 2010, RBI released a discussion paper on relevant issues, including capital requirement, the profile of promoters and foreign investment.

The process, however, got delayed due to the differences between the government and the regulator on certain issues such as foreign direct holding. For instance, while RBI has proposed a 49% limit on aggregate overseas holdings in the first five years, the government was in favour of a higher 74% cap to attract more foreign funds to the domestic market.

RBI last issued new licences in 2003 for Yes Bank Ltd and Kotak Mahindra Bank Ltd. Before that, in the mid-1990s, nine new banks opened and a cooperative bank was converted into a commercial bank.