RBI sets the ball rolling on new norms

RBI sets the ball rolling on new norms

Mumbai: The Reserve Bank of India (RBI) on Wednesday released a discussion paper on capital, ownership structure, foreign shareholding norms and the business model of new private banks, but stayed away from taking any position on the profile of the new entities that will be given licences to run such banks.

The Indian banking regulator merely flagged off certain issues and said it will set policies after receiving feedback from stakeholders by 30 September. It has not given any time frame for finalizing the policy, but said all applications will be examined by an external group and “a limited number of licences" will be given, based on the group’s recommendations.

It has, however, taken a clear stance on three aspects of new bank licences.

First, licences will be granted keeping in mind the larger mandate of financial inclusion apart from introducing competition.

Second, licences will not be given to any non-banking financial company (NBFC) or business house engaged in real estate activities.

Shares of a few NBFCs rose on Wednesday following the release of the discussion paper even as the Bankex, the index of banking stocks on the Bombay Stock Exchange, as well as the benchmark equity index, Sensex, fell.

Finance minister Pranab Mukherjee had announced in February that RBI will give licences to new banks. Wednesday’s discussion paper follows his budget announcement.

On the issue of minimum capital requirements for new banks, RBI proposed a few options apart from the existing Rs300 crore of capital requirement norm.

RBI proposed that the minimum capital requirement could be anything between the existing Rs300 crore and Rs1,000 crore. The minimum capital requirement could at the initial stage be also kept at Rs500 crore and raised to Rs1,000 crore within five years.

According to RBI, a higher minimum capital norm will ensure “banks operate on a strong capital base", and such banks would be able to take part more meaningfully in the financial inclusion drive through their ability to invest in technology. At the same time, promoters who commit such large amounts “may not be seriously committed to financial inclusion as they are likely to be focused on more profitable large-ticket size commercial banking".

Licences to industrial houses, according to the paper, ensure important sources of capital, management expertise and strategic direction, but a conflict of interest can arise as the firms could misuse the bank for their own needs and restrict credit flow to competitors.

It has also explored the option of giving preferences to industrial houses that operate in the financial sector.

Yet another option is allowing the industrial houses to take over regional rural banks (RRBs) before setting up banks. RRBs are currently 50% owned by the Union government, 15% by the respective state governments and 35% by sponsored commercial banks.

“I do not think RBI will allow corporate houses (to float banks)," said Suresh Ganapathy, head (financial research team) at Macquarie Securities Group.

“It won’t be easy for industrial houses to become banks. Also, there won’t be many licences. Strong promoters that have got the reach in semi-urban and rural areas for financial inclusion could be preferred," said Robin Roy, associate director (financial services) at audit and consulting firm PricewaterhouseCoopers.

The RBI paper also discussed at length the issue of converting NBFCs into full-fledged banks.

“I think there is merit to allow corporate houses and NBFCs to start banks," said Naresh Takkar, managing director of rating agency Icra Ltd. “RBI has been so far reluctant to allow companies, but I don’t think it is an open and shut case, given the discussions that are happening."

The paper has discussed all possible options when it comes to the promoters’ stake—keeping it at 40% and asking promoters to dilute holdings after five years (which is the current norm); starting the promoters’ stake at 5% and raising it to 20%; and allowing promoters to maintain a 40% stake.

The RBI paper also hinted at yet another option modelled on Canadian banks. Promoters can be allowed to hold up to 40% of a bank as long as its equity is Rs1,000 crore, but the promoters’ stake will progressively come down to 10-20% with the equity growing beyond Rs2,000 crore.

Finally, on the business model, RBI has suggested that apart from mandated 40% lending to agriculture and small loans, and 25% rural branches—current norms that all banks need to follow—the new banks could be asked to focus on financial inclusion by opening branches in tier III-tier VI towns with population of less than 50,000.

The capital requirement for the new banks should not be more than what it is in the jurisdiction of similar emerging economies, said Viren Mehta, director at audit and consulting firm Ernst and Young India Pvt. Ltd (E&Y).

“We need to compare capital requirements of competitive economies like Korea, Vietnam, etc. and evaluate that with our own requirement to come to a final capital norm," he said,

According to an E&Y study done three years ago, the capital requirement for new banks at that time was $75 million, or roughly Rs350 crore today.