PSUs seek clarity on bank licence eligibility

Written by fe Bureau | Mumbai | Updated: Aug 31 2011, 07:05am hrs
Even though Mondays Reserve Bank of India (RBI) draft guidelines on new bank licences specifically say only private entities can apply, three leading public sector entities Power Finance Corporation, Rural Electrification Corporation and IFCI have approached their administrative ministries for a clarification. Said HD Khunteta, CMD of REC: We have asked the government for a clarification on whether companies which are in the public sector can apply for a licence.

Many hopes were dashed with the draft guidelines saying promoter groups that earned 10% or more of their revenues, or have 10% or more of their assets, in real estate or broking would not be eligible to set up a bank.

As such, although non-banking financial companies (NBFCs) can enter the banking space, a few of them from the private sector may have to sit it out. Many of these NBFCs derive a fairly large proportion of their revenues from broking though they are attempting to diversify their revenue base.

Indeed, the guidelines favour those groups that have no presence in the financial services space. For others, the process of setting up a bank could turn out to be somewhat tedious. If a promoter group already has an existing NBFC that is involved in an activity that banks can undertake, activities undertaken by the NBFC will have to be transferred to the new bank. Otherwise, the NBFC will have to convert itself into a bank.

For example, in the case of Mahindra &Mahindra Finance and the Shriram Group, their asset financing businesses may need to merge with the bank. Whether the HDFC Group undergoes a change in its structure, since RBI has mandated an NOHC for new banks, remains to be seen.

Many of the larger industrial conglomerates, however, have a relatively small presence in both the broking and real estate spaces, and should easily make the cut. Not all of them have a diverse ownership, but are companies run by professional boards. Of course, the central bank has said, unequivocally, that apart from the 10-year business track record, it would take into account the credentials and integrity of a group while assessing its eligibility.

More specifically, the RBI will ask for feedback from other regulators and other agencies like the I-T department, CBI and the Enforcement Directorate. Moreover, the central bank needs to be convinced that the business plans are sound and that there is no deviation from the original blueprint.

Should a couple of large groups bag licences, it could set the stage for some M&A activity since there are several family-owned small banks in the private sector. Since these banks fulfill priority sector lending norms, they will be preyed on by newcomers.