Indias most marquee name opts out of banking race

Written by fe Bureau | Mumbai | Updated: Nov 28 2013, 11:28am hrs
The list of aspirants for a banking licence lost its most marquee name on Wednesday with the central bank announcing that Tata Sons Indias largest conglomerate had opted out, reports fe Bureau in Mumbai. The $100-billion salt-to software group believes its existing financial services model best supports the group and the interests of its shareholders. A total of 24 applicants remain in the fray for a possible 6-8 new licences; among them are the AV Birla Group, Larsen & Toubro, IDFC, the Bajaj Group and the Shriram Group. Tata Sons is the second applicant to pull out after the Videocon Group, which had applied through group company Value Industries, withdrew its application in September. Tata Sons has reached a conclusion that the groups current financial services operating model best supports the current needs of the Tata Group's domestic and overseas strategy, and provides adequate operating flexibility to its companies, while securing the interests of the groups diverse stakeholder base, the company said in a release on Wednesday.

The group added it would monitor developments and look forward to participating in the banking sector at an appropriate time.

Tata Sons' decision to withdraw its application comes at a time when the new Reserve Bank of India (RBI) governor Raghuram Rajan has hinted at significant changes in the banking structure over the coming years. Since taking over in September, Rajan has repeatedly said that the central bank is exploring the possibility of making licences available on-tap, along with considering differentiated licencing in the banking sector.If we are moving towards a scenario where there is no scarcity of licences, then the incentive to apply for a banking licence right now reduces, a senior consultant, who did not wish to be identified, observed. With the changing landscape, I wouldn't be surprised if a number of players rethink their plans, added the consultant.

In late August, an RBI discussion paper on banking structures had also noted the need for continuous and differentiated licences. There is a case for reviewing the current Stop and Go licensing policy and consider adopting a continuous authorisation policy, the paper had noted. In the meantime, the stringent checks and balances being imposed by the RBI on all group entities associated with a banking aspirant are also being seen as a deterrent for large and complex industrial groups. As part of its guidelines, the RBI had also said that the banking company will have to be ring-fenced from other volatile businesses within the group. Incidentally, Tata Sons recently announced its entry into the aviation business via a joint venture with Singapore Airlines.

The guidelines issued by the RBI are fairly onerous both in terms of the scrutiny on group companies and also in terms of regulatory and priority sector requirements, said Ashvin Parekh, advisor (financial services) at Ernst & Young. The RBI in its guidelines had asked new entrants to meet all existing norms such as priority sector lending and the mandated statutory liquidity ratio requirements. The need to meet these targets, particularly the priority sector lending target of 40% from the start has been seen as a significant burden for new entrants. The Tatas, however, seemed to indicate that those were not the reasons for their exit.

With the exit of the Tatas, most of India's largest industrial groups have decided to stay away from the banking sector, even though this was first time the RBI allowed corporates into banking after much debate. Reliance Industries and Mahindra & Mahindra did not apply for a licence, with the Mahindras citing tough entry norms laid down by the RBI.

The regulations provide that the CRR (cash reserve ratio) and SLR (statutory liquidity ratio) will be applicable from inception, even though building of the current account and savings account (CASA) will take some time for a newly-converted bank, Mahindra & Mahindra had said when explaining their decision not to apply for a licence.

The RBI had issued guidelines for new bank licences in May this year following which there were initially 26 applicants for banking licences. Despite the fact that bank licences are being issued for the first time in more than a decade, the response this time has been muted. In previous rounds in 1993 and 2003, the RBI had 100 and 113 applications respectively. Of these, nine had issued licences in 1993 and another two banks had been licenced in 2003. Licence applications are currently being scrutinised by the RBI, after which they will be referred to an external committee headed by former RBI governor Bimal Jalan. Licences are expected to be issued early next year.