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.