Too many aspirants but very few will make it, say analysts

Too many aspirants but very few will make it, say analysts

Mumbai: A day after the Reserve Bank of India (RBI) released its draft licensing norms for a new set of private banks, aspirants were busy justifying their claims to be eligible to set up banks even as analysts were not too optimistic about the chances of most of them.

“The biggest issue is how RBI is going to look at the promoters (of aspirant parties). The critical parameters are the corporate governance and the nature of promoters. The regulator won’t compromise on the overall quality of the group," Santosh Singh, analyst with Mumbai-based brokerage, Espirito Santo Securities, said.

On Monday, RBI said firms that have 10% or more exposure to real estate and brokerage businesses in terms of income or assets, will not eligible to set up a bank. Also, a corporation or a non-banking financial company (NBFC) will need a “diversified ownership, sound credentials and integrity", and a 10-year track record.

Experts said there needs to be more clarity on how RBI defines a diversified ownership.

“How do they define diversified ownership is something that needs to be seen. The question is will you call it a diversified ownership if one shareholder has 26% or more holding?" asked one Mumbai-based analyst, who did not want to be named.

Sachin Khedekar, senior manager, economic analysis group at Dun and Bradstreet India said there needs to be more clarity on RBI’s definitions of corporate groups and public sector companies.

RBI said it will give licence on a “very selective basis" and “it may not be possible for RBI to issue licences to all the applicants meeting the eligibility criteria," which, according to market observers, indicates that the apex bank’s discretionary powers will play a major role.

Singh of Espirito Santo Securities also said RBI has got sufficient discretionary powers.

Analysts are not sure how RBI will calculate a firm’s exposure to real estate and brokerage business.

For instance, Religare Enterprises Ltd (REL) has 13-14% of revenue generated from broking business, but the firm claimed that the promoter group, which will apply for the banking licence through REL, has “well below 10% of its revenue from broking".

“Our interpretation is that they intent to exclude pure brokerages, wherein the promoters and entities are fully focused on the vertical and substantially do propriety trading. In our case, the applicant will be promoter group through REL. Hence, we believe that we are eligible," Sachindra Nath, group chief executive officer of REL, said.

The company has appointed an advisory panel to guide the group’s banking venture.

Ramesh Iyer, managing director at Mahindra and Mahindra Financial Services Ltd said though his company is eligible as per the draft rules, more clarity will come only after discussion with the regulator.

G.S. Sundararajan, managing director at Shriram Capital Ltd, the holding company for financial services and Insurance entities of the Shriram Group, said the guidelines are a filter for companies to self-assess.

“We are keen and eligible. We have only 4-5% of income from properties. We are clear that we do not want to exit any of our current businesses and would like to build that book after getting a licence," he said.

Shriram Capital is also 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.

Sam Ghosh, chief executive officer at Reliance Capital Ltd, said his group is eligible because “only 2% of their income comes from brokerage."

In the case of Edelweiss Capital Ltd, contribution from broking is around 15%. Edelweiss did not want to comment for the story.

John Muthoot, chairman and managing director of Muthoot Pappachan Group, said though the group is eligible to apply, it is not keen in applying for a licence as of now and will focus on the opportunities in the non-banking space.

Nirmal Jain, chairman of India Infoline Ltd (IIFL), said the firm is surprised on the central bank’s move to keep brokerages out of the fray.

“When banks can do broking business, how come the reverse is not possible?" asked Jain.

An Emkay Global Financial Services Ltd note on Tuesday said chances for companies (such as) Religare Enterprises, Indiabulls Group and IIFL are “negative". Singh of Espirito Santo too agreed to this view.

Banking licence aspirants are also concerned about the stipulation to list the bank within two years of getting licence. They said it is not feasible and there is a need for more clarity on the aspect.

“There needs to be more clarity on the company getting listed in two years. It is a very challenging task for new players, especially given that you need to have 25% of their branches in rural areas," Nath of Religare said.

Sundararajan of Shriram said it is very difficult to become profitable within those conditions and “if we are not profitable, listing in two years will also be difficult."

Meanwhile, there was a mixed response in the stock market on the stocks of the firms that are aspiring for banking licence.

While Srei Infrastructure Finance Ltd rose 5.42% to close at 41.85 on Tuesday on BSE, Reliance Capital rose 1.8% to end at 384.45, while Bajaj FinServ Ltd dropped 5.3% to close at 541.55.

Similarly, L&T Finance Holdings Ltd dropped 2.46% to close at 49.65, Religare Enterprises was down 2.11% to close at 415.05 and Mahindra and Mahindra Financial Services rose 1.38% to close at 616.05. The benchmark Sensex gained 1.59% to 16,676.75 points.