New bank licensing norms to benefit NBFCs, global financial services cos

Written by fe Bureaus | New Delhi | Updated: Apr 1 2010, 03:43am hrs
Pure-play NBFCs with creditable track record like Shriram, Srei, Motilal Oswal, along with global financial services majors like Goldman Sachs, could be among the first to benefit from the Reserve Bank of Indias (RBI) decision to issue a clutch of additional banking licences. However, industrial groups wanting to convert their NBFCs to banks might have to wait a bit longer, official sources told FE.

The government and the central bank favour a staggered approach for new bank licensing because the duo feel that given the lingering uncertainty over the global commodity prices, it would be prudent to defer entry of corporate groups that have a large exposure to economic cycles of this special sector. Almost all industrial groups that have evinced interest in setting up banksTatas, Aditya Birla, R-ADAG for instancehave direct exposure to economic cycles.

As per the RBI norms, a new private sector bank should have a minimum net worth of Rs 300 crore. Also, within a time-frame, any single entity or group of related entities holding more than 10% equity in the bank would have to reduce the holding to that threshold. While this stipulation of diversified shareholding itself is a stumbling block for corporate groups, the government and RBI have also decided to tread an even more cautious path, and restrict the current batch of new bank licences to stand-alone NBFCs with proven performance and global majors, sources said.

The NBFCs would also have the option to take over some of the older private sector banks with thin capital bases.

There is a strong reason for any government or regulator to ensure that the promoters of banks do not have exposure to industries impacted by economic cycles, said Ernst & Youngs executive director (financial services) Ashwin Parekh.

Analysts reckon that one of the ways to improve access to banking services in the country is to increase number of banks in rural areas manifold. A host of NBFCs have already come up and become established players in various areas, like asset management, loans and advances, leasing and vehicle finance. While some of them have a pan-India presence, others have a more localised presence. Since NBFCs cannot accept retail deposits and have high borrowing costs, they are not as competitive as banks when it comes to lending. If some of the large NBFCs are allowed to commence banking operations, they would be able to lend at much lower rate and provide a significant boost to the economy.

RBI has approved two new bank licences since the finance minister Pranab Mukherjee said in his Budget speech that the central bank is considering additional banking licences to private players including NBFCs. Both these licences went to global financial service companiesSwitzerland-based Credit Suisse and the Australia & New Zealand Banking Group. Encouraged by the Budget announcement, Goldman Sachs said it has applied for commercial banking licence in India. The firm has already got a licence for asset management functions.

Currently, foreign banks are barred from expanding their network in India through mergers & acquisitions. Of course, they can expand their network in India through wholly-owned subsidiary route, but because of the limited utility of this route for rapid expansion of the network and the tax advantage of branch-expansion route, few foreign banks have opted to float wholly-owned arms in India. In 2009, RBI raised the number of branches that foreign banks collectively can open in India from 12 to 20. But, during the last two years, only two foreign banksSingapore-based DBS (thanks to India-Singapore the comprehensive economic cooperation agreement) and Switzerlands UBShad been allowed to set up bank branches, in addition to Credit Suisse and ANZ that have received the licence recently to commence banking operations.

The last bank licence in the domestic private sector was given to YES Bank in 2003 and Kotak Mahindra, an NBFC was allowed to be converted to bank in the same year.