Risk to democracy: Business houses shoudn't get bank licences--ET

Risk Of License For New Banks

By: Jaithirth Rao


Dear Shri Subbarao, Mark Antony refers to Brutus and his friends as "honourable men." In the same spirit, I would like to say that our major industrialists are all honourable men. But I would beg you not to grant banking licenses to these honourable persons. 

In the bastions of market capitalism - New York, London and Brussels, let alone in Dublin and Reykjavik - it has been established that hapless taxpayers will bail out banks irrespective of the risks these banks take in arcane areas like credit derivatives, double-securitised mortgages, sovereign credits to profligate governments and other transactions ascribed to a mysterious London whale. 

Remember R K Hazari 

Once we allow desi business houses to set up banks, not only will Indian taxpayers have to bail them out of their banking mistakes (and trust me, they will commit mistakes on a gigantic scale), we will also have to bail out steel companies, cement companies and telecom companies that these groups control (where there is no reason to believe that they will not commit mistakes). 

They will produce unassailable reports from unassailable economists arguing that our economy will be irretrievably hurt, unless we bail out these bank promoters from the "systemic risk" associated with their other companies. 

The citizens of Ireland and Iceland have paid for the follies of their banks. The citizens of India will be called upon to pay for follies associated with building inefficient steel plants, running cement plants badly and pricing telephone calls stupidly. Despite all the controls, separation of operations and Chinese walls that the honourable business houses promise to adhere to, there will be pooling of funds and pooling of risks. 

If the business house's engineering company suffers a rating downgrade, for instance, do we really think that there will not be a contagion effect? And will there not be well-meaning economists begging you to save the engineering company because that would be a patriotic act "essential" to protect the bank's depositors? The late RK Hazari was an illustrious deputy governor of your institution. 

Hazari produced a brilliant report in the 1960s which showed how cleverly our business houses used the permit-license raj to enrich themselves and hold back economic growth of the country as a whole. The control of banks and insurance companies by the honourable business houses was in fact cited frequently those days as having baneful economic consequences. 

It is widely held by economic historians that if the entrenched rich are allowed to control financial markets, then they consciously or otherwise, make sure that new and not-sowell-connected entrepreneurs are deprived of access to capital. Banks controlled by large conglomerates will almost certainly set back the entrepreneurial movement in the country, where the emerging ecosystem is allowing persons without inherited wealth a semblance of access to capital.

Reining in Brutus 

From a political economy perspective, we already have a situation where business houses have acquired disproportionate power, something which is dangerous for our democracy. In the India International Centre in Delhi, "informed" people have hush-hush discussions that secretaries and even cabinet ministers have been sponsored by specific business houses. 

It is said that Goldman Sachs can learn lessons from our business houses as to how to go beyond crony capitalism and move on to the commanding heights of regulatory and state capture! 

If this is the case today, what will happen if our honourable business houses are given banking licenses, adding to the clout that they already possess? Government spokespersons are making the case that the entry of honourable business houses into banking will increase competition. 

The only rational response to such bizarre arguments is the old one: "You must be joking?" There is nothing to prevent the government from selling down its stakes in nationalised banks to a large diversified investor base. After all, many of them were taken over in 1969 from honourable business houses. That would automatically improve the competitive environment in Indian banking. 

But our imperial and imperious government in Delhi will always reject the obvious solution. In order to prevent a sleight-of hand action, you must use the oldest weapon in the armoury of the Indian bureaucracy. Before you retire governor Subbarao, please write a strong file note emphatically turning down bank licenses for our honourable business houses. 

Once this "note" and related "notings" are in place, given that these are the days of RTI, it will become impossible for Brutus' contemporary compatriots from gaining power. It will be a step towards making India pro-business rather than pro-markets, and weakening our democracy. 

http://economictimes.indiatimes.com/opinion/comments-analysis/risk-to-democracy-business-houses-shoudnt-get-bank-licences/articleshow/20921226.cms?curpg=2

New bank licences' aspirants: Reliance Industries, others' shares up on RBI invite

PTI: MUMBAI, FEB 25 2013, 13:03 IST

Shares of entities interested in entering the banking space, including those from Reliance Industries, Birlas, M&M and L&T groups, today surged as much as 8 per cent following RBI's guidelines for giving new bank licences.

More than a dozen corporates as well as state-owned firms such as PFC, LIC and India Post, are likely to apply to the Reserve Bank for licence for setting up banks.

The biggest early gainer was Religare, whose stock was up 7.99 per cent on hopes of its entering the banking sector.

Shares of Power Finance Corporation (PFC), whose Chairman and Managing Director Satnam Singh has said the company would seek approval for entering into banking space in the next board meeting, surged 1.66 per cent on the BSE.

The stock of L&T Finance was up 5 per cent, while that of Reliance Capital was up 1.02 per cent, as both the companies said they will apply for the licence.

Shares of Aditya Birla Nuvo surged 2.72 per cent on the BSE and touched a high of Rs 1,100. The stock was later trading 1.67 per cent up from its previous close.

Among others, M&M Financials stock was up 4.19 per cent, Bajaj Finserv - 3.59 pc, IDFC - 1.25 pc, IFCI - 1.50 pc, IndiaBulls Financial Services - 0.57 pc.

While announcing comprehensive guidelines for new bank licences on February 22, the Reserve Bank said interested entities can file their applications by July 1.

As per the new norms, entities with a minimum track record of 10 years would be eligible for licence after clearance from sector regulators, enforcement, investigative agencies such as I-T Department, CBI and ED.

The minimum paid-up capital for setting up a bank will be Rs 500 crore. The cap on the foreign investment, including FDI/FII and NRI, has been set at 49 per cent.

New bank licences: 16 commandments

Live Mint ;Fri, Feb 22 2013. 05 59 PM IST

# Private firms, public sector entities as well as non-banking financial companies (NBFCs) are eligible to set up a bank. This needs to be done through a wholly owned non-operative financial holding company (NOFHC). Existing NBFCs, if considered eligible, will be permitted to promote a new bank or convert themselves into banks.

# NOFHC will be wholly owned by the promoter and will hold the bank as well as all other financial services entities of the group.

# Applicants should be financially sound with a 10-year track record.

# The initial minimum paid-up equity capital is Rs.500 crore.

# NOFHC will initially hold a minimum 40% stake in the bank for five years. This will be brought down to 15% in 12 years.

# The bank will have to get listed on stock exchanges within three years of the commencement of business.

# Foreign shareholding in the new bank is capped at 49% for the first five years.

# The new bank will have to maintain a minimum capital adequacy ratio of 13%—that is Rs.13 capital for every Rs.100 worth of assets—for the first three years.

# At least 50% of the directors of NOFHC should be independent directors.

# NOFHC and the bank shall not have any exposure to the promoter group. The bank shall not invest in the equity/debt capital instruments of any financial entities held by NOFHC.

# The board of the bank should have a majority of independent directors.

# At least 25% of branches of a new bank should be set up in unbanked rural centres with a population of up to 9,999.

# Applications seeking bank licences should be submitted on or before 1 July.

# At the first stage, the applications will be screened by the Reserve Bank. Following this, the applications will be referred to a high-level advisory committee

# The decision to issue in-principle approval for setting up a bank will be taken by the Reserve Bank of India following the recommendations of the committee.

# The licence will remain valid for one year.

RBI releases Guidelines for Licensing of New Banks in the Private Sector

 Guidelines for “Licensing of New Banks in the Private Sector”.

Key features of the guidelines are:

(i) Eligible Promoters: Entities / groups in the private sector, entities in public sector and Non-Banking Financial Companies (NBFCs) shall be eligible to set up a bank through a wholly-owned Non-Operative Financial Holding Company (NOFHC).

(ii) ‘Fit and Proper’ criteria: Entities / groups should have a past record of sound credentials and integrity, be financially sound with a successful track record of 10 years. For this purpose, RBI may seek feedback from other regulators and enforcement and investigative agencies.

(iii) Corporate structure of the NOFHC: The NOFHC shall be wholly owned by the Promoter / Promoter Group. The NOFHC shall hold the bank as well as all the other financial services entities of the group.

(iv) Minimum voting equity capital requirements for banks and shareholding by NOFHC: The initial minimum paid-up voting equity capital for a bank shall be `5 billion. The NOFHC shall initially hold a minimum of 40 per cent of the paid-up voting equity capital of the bank which shall be locked in for a period of five years and which shall be brought down to 15 per cent within 12 years. The bank shall get its shares listed on the stock exchanges within three years of the commencement of business by the bank.

(v) Regulatory framework: The bank will be governed by the provisions of the relevant Acts, relevant Statutes and the Directives, Prudential regulations and other Guidelines/Instructions issued by RBI and other regulators. The NOFHC shall be registered as a non-banking finance company (NBFC) with the RBI and will be governed by a separate set of directions issued by RBI.

(vi) Foreign shareholding in the bank: The aggregate non-resident shareholding in the new bank shall not exceed 49% for the first 5 years after which it will be as per the extant policy.

(vii) Corporate governance of NOFHC: At least 50% of the Directors of the NOFHC should be independent directors. The corporate structure should not impede effective supervision of the bank and the NOFHC on a consolidated basis by RBI.

(viii) Prudential norms for the NOFHC: The prudential norms will be applied to NOFHC both on stand-alone as well as on a consolidated basis and the norms would be on similar lines as that of the bank.

(ix) Exposure norms: The NOFHC and the bank shall not have any exposure to the Promoter Group. The bank shall not invest in the equity / debt capital instruments of any financial entities held by the NOFHC.

(x) Business Plan for the bank: The business plan should be realistic and viable and should address how the bank proposes to achieve financial inclusion.

(xi) Other conditions for the bank :

The Board of the bank should have a majority of independent Directors.
The bank shall open at least 25 per cent of its branches in unbanked rural centres (population upto 9,999 as per the latest census)

The bank shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic banks.

Banks promoted by groups having 40 per cent or more assets/income from non-financial business will require RBI’s prior approval for raising paid-up voting equity capital beyond `10 billion for every block of `5 billion.

Any non-compliance of terms and conditions will attract penal measures including cancellation of licence of the bank.

(xii) Additional conditions for NBFCs promoting / converting into a bank : Existing NBFCs, if considered eligible, may be permitted to promote a new bank or convert themselves into banks.

Procedure for application:

In terms of Rule 11 of the Banking Regulation (Companies) Rules, 1949, applications shall be submitted in the prescribed form (Form III). The eligible promoters can send their applications for setting up of new banks along with other details mentioned in Annex II to the Guidelines to the Chief General Manger-in-Charge, Department of Banking Operations and Development, Reserve Bank of India, Central Office, 12th Floor, Central Office Building, Mumbai – 400 001 on or before July 1, 2013.

Procedure for RBI decisions:

At the first stage, the applications will be screened by the Reserve Bank. Thereafter, the applications will be referred to a High Level Advisory Committee, the constitution of which will be announced shortly.

The Committee will submit its recommendations to the Reserve Bank. The decision to issue an in-principle approval for setting up of a bank will be taken by the Reserve Bank.

The validity of the in-principle approval issued by the Reserve Bank will be one year.

In order to ensure transparency, the names of the applicants will be placed on the Reserve Bank website after the last date of receipt of applications.

Background

It may be recalled that after the announcement made by the Hon’ble Finance Minister in his Budget Speech for the year 2010-11, the Reserve Bank had put out a Discussion Paper on its website on August 11, 2010 inviting feedback and comments. Thereafter, the draft guidelines on the licensing of new banks were released on the Reserve Bank website on August 29, 2011 inviting views and comments. Comments and suggestions received on the draft guidelines were examined and some of the suggestions were accepted. After the vital amendments to the Banking Regulation Act, 1949 were carried out in December 2012 and after consulting with the Government of India, the guidelines for “Licensing of New Banks in the Private Sector” have now been finalised.

R.R. Sinha
Deputy General Manager
Date : 22 Feb 2013

Decks cleared for third set of private banks

The deadline for applications for new bank licences is 1 July, RBI said. Photo: Abhijit Bhatlekar/Mint


Live mint :Dinesh Unnikrishnan :Joel Rebello :Anup Roy : Fri, Feb 22 2013

RBI unveils norms three years after govt first announced plan, 

nine years after last round of licences were issued

The Reserve Bank of India (RBI) on Friday unveiled norms for the entry of a third set of private banks into the Rs.73 trillion banking sector, three years after the government first announced the plan and nine years after it issued the last round of licences.

The minimum capital required by applicants for licences is Rs.500 crore, and foreign shareholding in the new banks will be capped at 49% for the first five years.

The new banks should be set up under a non-operative financial holding company (NOFHC), RBI said. The deadline for applications is 1 July.

In contrast with its draft guidelines, RBI has removed a ban on brokerages and realtors from applying for a banking licence. But winning a licence may be tougher for these companies as the central bank has stipulated that bank promoters’ business culture should not be misaligned with the banking model.

“Their business should not potentially put the bank and the banking system at risk on account of group activities such as those which are speculative in nature or subject to high asset price volatility,” RBI said.

According to RBI, promoter groups should have a past record of sound credentials and integrity, should be financially sound, and have a successful track record of running their business for at least 10 years. The norms also allow public sector units to seek a bank licence.

Rajiv Takru, secretary for financial services at the finance ministry, said all safeguards are in place to prevent reckless entities entering the banking sector. He expects to see a few new banks by the end of the next fiscal year.

The new banks will have to maintain a minimum capital adequacy ratio, or ratio of capital to risk-weighted assets, a measure of financial strength, of 13% for the first three years.

They need to list their shares on stock exchanges within three years of starting operations. In the past, RBI had given one year to banks for listing.

At the first stage, the applications will be screened by RBI, following which they will be referred to a high-level advisory committee. The decision to issue in-principle approval for setting up a bank will be taken by the central bank following the recommendations of the committee.

Shinjini Kumar, a director at PricewaterhouseCoopers, said RBI had done a “very politically correct thing” by allowing companies across sectors to apply for licences.

“Though it makes the task of the selection committee tougher, it should not be a worry because Indians are used to competition. The draft also has a 10-year experience criterion, but clarity is needed on whether the 10-year track record is at the promoter level or at the management level,” Kumar said.

The holding company should own a minimum 40% of the equity capital in the bank, which has to be reduced to 15% in 12 years.

An NOFHC will be registered as a non-banking financial company with RBI and will be governed by a separate set of directions issued by the banking regulator. Further, the financial entities held by the holding company will be governed by the respective sector regulators.

RBI has made it mandatory for new banks to open at least 25% of branches in rural centres, which could make the task tougher for most aspirants, experts said.

“The 25% rural presence is almost impossible to achieve as even the existing private sector banks are finding it difficult to achieve this reach,” said Abhishek Kothari, an analyst at Mumbai-based Violet Arch Securities Ltd. At least 40% of India’s adult population does not have access to banking services.

At least 20 companies have so far expressed interest in starting banks.

The list includes L&T Finance Holdings Ltd, India Infoline Ltd, Religare Enterprises 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, Janalakshmi Financial Services Pvt. Ltd, Tata Capital Ltd, Muthoot Finance Ltd, IDFC Ltd, Reliance Capital Ltd, India Infrastructure Finance Co. Ltd, Bajaj Finserv Ltd, SKS Microfinance Ltd and Srei Infrastructure Finance Ltd.

The firms welcomed the guidelines. “Overall the guidelines are positive because there is no one who is excluded and everyone can apply,” said Shachindra Nath, group chief executive officer (CEO) of Religare Enterprises, one of the contenders.

Reliance Capital said it will apply for a licence. “We welcome the new banking guidelines and will be interested in applying for the banking licence,” said Sam Ghosh, CEO.

“We will be interested in applying for a banking licence,” said Sunil Kanoria, vice-chairman of Srei Infrastructure.

“It is heartening to note that the guidelines emphasize the requirement of sound credentials, integrity and successful track record,” said Bharat Doshi, chairman of Mahindra and Mahindra Financial Services.

He said the company will look at the opportunity after a review by its board and that of parent companyMahindra and Mahindra Ltd.

K.R. Kamath, chairman of the Indian Banks’ Association lobby group, expressed hope that the new banks will help to spread banking services to unbanked areas.

“New banks will definitely increase efficiency of the existing banks as they will come up with new products and services that will increase competition,” said Kamath, also the chairman of Punjab National Bank.

RBI rules require at least half the boards of NOFHCs be made up of independent directors.

The central bank had issued a discussion paper in August 2010 and followed it up by releasing draft guidelines a year later, in August 2011.

While the government is keen on seeing more banks to expand banking services, RBI, in the recent past, has expressed its reluctance to allow corporate houses to start banks, given the choice.

“We are painfully aware of the pitfalls, but we will make sure that regulations are not subverted,” deputy governor Anand Sinha had said at a seminar in Pune in October.

It took time to frame the licensing norms as RBI insisted on critical amendments in the banking law as a precondition. This was to empower it to supersede the boards of banks in case of any serious violation of norms.

The government has obliged and under the changed law, RBI can dismiss a board and appoint an administrator to run a bank for up to one year.

“These norms are well drafted, very clear. There is no ambiguity and they have given enough time for people to comply,” said Deepak Parekh, chairman of Housing Development Finance Corp. Ltd. He said though that “25% rural branches is a tough thing to achieve”.

Past experience

Following the nationalization of 14 large banks in 1969 and another six in 1980, RBI has so far given licences to just 12 banks in two phases, including the conversion of a cooperative bank into a commercial bank in the first.

In 2001, RBI had fixed the minimum capital requirement for applicants at Rs.200 crore, to be raised to Rs.300 crore in three years. In 1993, the requirement was Rs.100 crore.

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 Ltd, IDBI Bank Ltd, Times Bank and Development Credit Bank Ltd.

In 2003-04, RBI issued licences to two more banks—Kotak Mahindra Bank Ltd and Yes Bank Ltd.

From the first lot, Times Bank was merged with HDFC Bank in February 2000—the first of the so-called friendly mergers 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 non-performing 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 as the parent found it difficult to survive without access to cheap funding, and competition between financial institutions and commercial banks intensified. Industrial Development Bank of India (IDBI) followed this same route and got itself merged with IDBI Bank in 2004.

Kotak Mahindra Bank and Yes Bank, the two latest entrants, have been performing well.

Move to allow Industrial houses to open banks opposed

Source  : The Hindu : 19 Nov 2011

The general secretary of All India Bank Employees Association (AIBEA) C.H. Venkatachalam has said that allowing corporate industrial houses to open private banks of their own would be “ detrimental to the economy of the country.”

Inaugurating the delegate session of the 27th All India Conference of State Bank of Travancore Employees’ Union here on Saturday he said that “Corporate industrial houses in India are known to account for the major share of NPAs in the country. In this backdrop, the Government move to liberalise bank licensing policy to enable the very same industrial houses to open private banks of their own would be detrimental to the economy of the country.”

Wall Street agitation an eye opener

The AIBEA General Secretary cautioned that the ongoing agitation in Wall Street should serve “ as an eye opener to the policy makers of India, who are trying to run the economy and Banks of the country the American way. ”

He has strongly opposed the move of the Central Government to merge banks of regional significance like State Bank of Travancore. The merger would simply mean that such banks would cease to exist, depriving their respective regions of the service rendered by them.

He alleged that the Government is trying to sabotage the bipartite service agreements of Bank employees, prevalent since 1966 through the Khandelwal Committee Report and warned that the Bank Unions would launch a joint struggle against any attempt to implement the same.

The three day conference commenced here with flag hoisting by A. L. Rappai, President of the Union. K. Muraleedharan Pillai, General Secretary of the Union, presented the report.

Not all finance firms want to be banks

By Sarbajeet K Sen Mar 14 2010 , New Delhi

Not many eligible non-banking finance companies (NBFCs)

 seem keen on turning into banks, even

after the budget said new licences could now be given

 for starting banks.

Three large NBFCs, including Sundaram Finance,
 Manappuram Finance and Muthoot Pappachan, told  that
they were not considering a move to become banks.

The reason was what they called the “restrictive” regulatory
framework for the banking sector. This makes banks a not so attractive proposition.

Representatives of the Finance Industry Development Council
(FIDC), the apex body for asset finance companies (AFCs) which
holds 70 per cent of the country’s NBFC assets, agreed that finance
companies might face more shackles if they were to turn into banks.
They feel more comfortable with the free play that an NBFC enjoys in
 relation to banks.

In his budget speech, finance minister Pranab Mukherjee said
that the Reserve Bank of India (RBI) was considering grant of
fresh bank licences. He specifically mentioned NBFCs as a category
that might be given licences to bring about greater competition
in the banking sector. RBI is in the process of drafting fresh norms for
grant of new bank licences.

Raman Aggarwal, FIDC co-chairman, cited feedback from the industry-segment
that he represented to say that not many AFCs were interested in
applying for bank licences. “Only a few AFCs such as Shriram
Transport Finance are looking at the option.
Other than restrictive regulatory issues such
as those on directed lending, NBFCs may not find it
economical to convert into banks. There are massive
expenses in terms of skills and technology needed to
offer services such as ATMs, credit cards and anywhere banking,” he said.


According to the economic survey 2009-10, 330-plus AFCs hold 70.3 per
cent of the total assets and liabilities of India’s over 12,700 NBFCs in India.


The Chennai-based Sundaram Finance is not looking at the option
as “we do not have the ambition (of becoming a bank),”
according to its managing director, TT Srinivasaraghavan.

 “We see no great advantage in becoming a bank,” he said.


He said his company would prefer to consolidate its core
businesses. “Our core competency is in areas such as
financing of trucks and cars. If we intend to go into
other areas such as project financing, trade financing,
 then it may be a good idea to become a bank. But if you
see universal banks like ICICI Bank, SBI and others, what
great value an NBFC-turned-bank can offer is not clear,” he said.


VP Nandakumar, group chairman of Manappuram Finance, a
 big Kerala-based company, said, “One has to look at core
strengths. Our core competency is loan against jewellery
 through our 1,000 branches. Some NBFCs have competency
in vehicle finance, some in infrastructure finance,
some other in mortgage finance. How an NBFC can leverage
 its core competency after becoming a bank is not clear,” he said.

He said NBFCs would be wary of the regulatory issues such
as compliance with priority sector regulations, CEO appointments
and the holding pattern in banks. “How would an NBFC that
 becomes a bank scale up priority sector lending to 40 per cent
of its net credit in a short time is an issue. Also NBFCs have
 a free hand in appointing top officials such as CEOs.


As a bank, it has to get RBI clearance.

Besides, the equity holding pattern and voting
rights are very restrictive for a bank,” he said.


Thomas George Muthoot, managing director of the Muthoot
 Pappachan group, another large Kerala-based NBFC, which
is into gold loans, consumer finance and auto loans, said
 that he was not keen on becoming a bank.

“There are good opportunities for NBFCs, specially
those with strengths in rural areas. We have more
flexibility than banks in terms of expanding our branch
network and dealing with customers. Most often in lending deals,
it is not a question of interest rate but really a case of getting
credit at the right time. Good NBFCs are able to offer a better deal
in this regard,” he said.

Other than Shriram Transport Finance, NBFCs whose
 names are doing the rounds as possible aspirants to
 bank licences are IFCI, Reliance Capital, the Indiabulls
 group, the Religare group and LIC Housing Finance.