‘The Indian Banking system has emerged unscathed
from the crisis. We need to ensure that banking system grows in size and
sophistication to meet the needs of modern economy. Besides, there is need to
extend the geographic coverage of banks and improve access to banking services.
In this context, I am happy to inform the Honourable members that RBI is
considering giving some additional banking licenses to private sector players.
Non-Banking Financial Companies could also be considered, if they meet the
RBI’s eligibility criteria’.
-Pranab Mukherjee
This was the statement made in the budget speech 2010-11 by the then Finance
Minister Shri Pranab Mukherjee, after which RBI put a discussion paper on its
website and year after draft guidelines were released for ‘licensing of new
banks’ on RBI’s website on August 29, 2011. The
final guidelines have been released after almost one and half years by taking
into consideration the feedback to the draft guidelines from different
stakeholders. And now that the
guidelines for “Licensing of new banks in the private sector” had been
finalised on February 22, 2013, let us first see what are the restrictions that seem challenging to the
entities applying for the license for new banks.
1. To get a banking licence, companies must show a 10
year track record of “successful” operation, a business model that isn’t
speculative or vulnerable to volatile assets prices, and they must pass a “fit
and proper” test.
2. As
per the 2013 final guidelines, promoters/promoter groups will be permitted to
set up banks only through a wholly owned Non-Operative Financial Holding
Company (NOHFC), which will hold the bank, as well as all other financial
services companies regulated by the RBI or other financial sector regulators.
3. The promoters should contribute minimum of INR 200
crores (40% of INR 500 crores), which shall be locked in for a
period of five years from the date of commencement of the business of the bank. Any
shareholding by NOFHC beyond 40% shall be brought down to 40% within three
years from the date of commencement of business of the bank. The shareholding
by promoter shall be brought down to 20% of the paid-up capital of the bank
within a period of 10 years and to 15% within 12 years from the date of
commencement of business of the bank and retained at that level thereafter.
4. Also, there is restriction on the shareholding
patterns of FDI, FII’s and NRI’s. Their shareholding in new banks should not
increase 49% for the first five years from the date of licensing of the banks.
After 5 years, this foreign shareholding can be increased to 74% of the paid-up
capital.
5. The
final guidelines mandated that the new bank will open at least 25% of its
branches in unbanked rural centres (population up to 9,999 as per latest
census). At present, existing banks are also required to allocate at least
25 percent of the total number of branches proposed to be opened during a year
in unbanked rural (Tier 5 and Tier 6) centres.
6. The
banks have to maintain a capital adequacy ratio of 13% of its risk weighted
assets for a minimum period of 3 years. Another being, banks have to list their
shares within 3 years of the commencement of business.
7. Also
the promoters/promoter groups with an existing NBFC will have restructure in
terms of business alignment and tax implications and along with that they have to comply with the norms on reserve requirements and
priority sectors.
8. There
is restriction on NOFHC to setup any other financial services entity for next 3
years from the date of licensing.
As we have seen so many
challenges before the promoters, let us see what the implications of the same
are.
1. First
challenge will mainly affect the industries that are volatile in nature like
brokerage, real estate companies. Though RBI opened the way for them but still
it will be tough for these industries to abide by the business model and “fit
and proper criteria.
2. As
per the second point, the promoters will have a tough time because they may
have to restructure their existing financial businesses under NOFHC.
3. Third
challenge will be faced by the promoters as they will be held accountable for
the bank (possessing 40% stake initially) and also they have to prove their
ability to provide a good track record.
4. Fourth
restriction is mainly imposed because RBI wants to discourage any influence on
the Indian banking industry by any foreign entity.
5. Fifth
point will put pressure on the new entities and the entities which have their
operations only in urban areas. Branches in rural areas are essential to
address the existing asymmetries in achieving financial inclusion, which RBI is
trying very hard to accomplish.
6. To
maintain CAR of 13% will be tough as promoters may have to go slow on growth
and they may have to provide evidence of their sustainability and also listing
within 3 year time frame is tough.
7. Here
NBFC’s have to convert their branches to bank branches which will require much
of restructuring. Also, RBI is attempting to avoid control by the
promoters as well as ensure the commitment of the promoters. The norms for
issuance of new banking licenses include Promoters eligibility, Fit and Proper
criteria, Corporate Structure of the NOFHC, Corporate Governance, prudential
norms etc.
8. Not
setting up any other financial entity is to protect the public interests.
According
to RBI estimates, almost 40-45% of the population in India, does not have any
access to Banking services and is presently outside the purview prevailing
banking system. Hence there was a need felt, to bring this population to the
main stream by various measures under the heading of Financial Inclusion to
ensure inclusive economic growth, without regional imbalances.
As of now, RBI had received 26 public, private applications for new licenses.
So, on this RBI Governor said that not all the applicants fulfilling the
eligibility criteria will be granted the license. Also, the applicants with
more NPA will be at risk. This objective of financial inclusion will place a
heavy demand on profitability and capital. It will also result in the new banks
taking a long time to get established. So profitability of the new banks will
be limited till they secure a strong foothold.
It is quite clear from the number of applicants which is very less as per the market's
expectation, reflecting that there are stricter regulations and high barriers
to entry that limit the competitive advantage of getting a bank licence,
especially for established non-bank financial institutions (NBFI).
Despite the restrictions on new licenses, the investors see room for
expansion. There are large
conglomerate-backed entities like Aditya Birla Nuvo, L&T Finance and
Reliance Capital in the fray. The last named has roped in two Japanese partners
in Mistui Trust Bank and Nippon Life Insurance. Financial services players like
India Infoline, Edelweiss Capital and Religare have also thrown their hats into
the ring. There is also India Post, with its huge countrywide network of post
offices and deposit mobilisation machinery.
1993-2001 experience in
the banking sector was good and encouraging. Private banks like ICICI,
HDFC and YES bank showed tremendous growth and are considered in top private
players in the banking industry. Consequently, share of public banks came down
from 90% in 90’s to approximately 75% currently. Under the new banking norms
the requirements are tough.
Concluding,
in the short term, new private banks will have to work hard so as to establish
them and protect the interest of the shareholders. As currently the banking
coverage is 6.3 per lakh or we can say 7 lakh branches approximately which show
our country is under banked. So there is a lot of scope for new banks to spread
the wings all over the country to derive the full benefit, supported by strong
technical and adequate capital as well as risk mitigation. There is a lot of
attention on financial inclusion as well as priority sector lending. It is
expected that overall the new banks will do well, but the initial period may be
little more challenging than what the earlier private banks underwent.
References:
“This article is written by
Ms. Bhanupriya Gupta. She is a PGDM student of 2013-15 batch of IIM Raipur. She
holds a Post Graduate Diploma in Securities Markets from National Institute of
Securities Markets. She can be reached at pgp13009.bhanupriya@iimraipur.ac.in.”
Good insightful article!
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