Notwithstanding the finance ministry?s initial prodding to go big on new bank licensing, the Reserve Bank of India (RBI) has got the ministry to toe its cautious line on how to expand the banking sector in India. The ministry and RBI have come to an understanding that big corporate houses ought not to be allowed to enter the banking business at this juncture.
The move is in recognition of the risk to banks? integrity from the corporates? other business interests and the paramountcy of maintaining domestic financial stability in times of global crisis.
Official sources said a maximum of four new banks would be allowed and these would be promoted by pure-play NBFCs subject to the central bank’s strict eligibility criteria. There would also be a condition that promoter holding in the bank, to be set at 40% initially, would be reduced within a rather tight time-frame.
The move dashes the banking hopes of corporate majors like Tatas, M&M, ADAG, AV Birla Group and L&T. As the definition of ?big industrial/business house? is ambiguous, the fate of even other aspirants such as Indiabulls, Shriram Finance, Religare and Srei is rather uncertain because they too have significant cross-holdings in group firms. The new licences would likely be available for institutions like IFCI.
?It (deciding if any applicant has significant interests in other group businesses which may impact the integrity of the bank) should be an objective test, rather than one of perception,? said Hiresh Wadhwani, partner (financial services), Ernst & Young.
Currently, banks are allowed to have an aggregate 74% foreign holding with a cap of 5% for a single investor. For the new licensees, the policy will be stricter, with aggregate foreign holding cap (including FDI, NRI and FII) at 49%, with a condition that a non-resident won?t hold than more than 5% of the paid-up capital. The minimum paid-up capital could be set at R500 crore, compared to R300 crore for existing banks, sources said.
The new banks will have to mandatorily open a certain number of branches in rural and semi-urban areas. This is to honour the government?s objective of financial inclusion, even as the country?s banking system grows in size and sophistication to meet the needs of a modern economy.
A top source said the finance ministry has formally conveyed to the RBI its willingness to accept the central bank’s views on having a calibrated, rather than sudden, expansion of India’s private banking sector. The RBI will soon announce its guidelines for new banking licences.
The RBI’s move to not let ?promoter groups? (read big industrial and business houses) into banking would look like a climb-down from the position it took in a recent note to the finance ministry. In the note, the central bank had summarised its views on new bank licences and foreign shareholding in Indian banks, following the August 2010 discussion paper and comments received on the same. RBI had spoken in favour of allowing big corporate groups to set up banks through the wholly-owned non-operative holding company (NOHC) route with the rider that the NOHC would hold a minimum of 40% of the paid-up capital of the bank with a five-year lock-in. The NOHC as well as other companies of the group would be subject to RBI’s ?consolidated supervision? to avoid any contagion risk to the bank. The NOHC’s stake in the bank, the RBI had said, would have to be reduced to 15% in 10 years. In March this year, the Cabinet had approved a proposal to amend the Banking Regulations Act to make voting rights in private sector banks proportionate to the shareholding, which led to speculation that corporates might finally be allowed to set up banks. The voting right is currently capped at 10%, and this is seen by the industry as a huge disincentive. Thanks to the cap, promoters of private banks like Kotak Mahindra Bank, YES Bank and IndusInd Bank are required to go through the shareholder resolution route to make any business decision of significance.