Stage set for debut of new private banks

Written by Sunny Verma | New Delhi | Updated: Apr 28 2012, 09:10am hrs
Decks have been cleared for the Reserve Bank of India (RBI) to issue new bank licences to private sector players, with the Union Cabinet on Thursday approving amendments to the Banking Regulations Bill which clarifies regulatory issues in this respect. The government hopes the Banking Laws (Amendment) Bill will be passed in the Budget session of Parliament.

While welcoming the move towards entry of new banks, analysts criticised the governments decision to cap shareholders voting rights. The Cabinet approved a proposal from the standing committee on finance to cap shareholders voting rights in private banks at 26% irrespective of their total holding, as against the original proposal of aligning voting rights with the level of shareholding. At present, voting rights in private banks are capped at 10% irrespective of their shareholding in the entity.

Limiting voting rights does not help, said Bobby Parikh, chief mentor & head of private equity practice at consulting firm BMR Advisors. The original idea was to get one voting right per share. The new proposal (to cap voting rights at 26%) is a relic from the past, when government went in for nationalisation of banks, Parikh said.

The government diluted the original recommendations of the standing committee to ensure a political majority for pushing through this key banking reform in the Parliament. Even as the voting share in private banks is proposed to be raised to 26% from 10%, this is unlikely to cheer investors looking to control banks.

Foreign investors, too, may not be keen to build large stakes in Indian banks. HSBC currently owns 9.2% of Axis Bank and 4.8% stake in Yes Bank. Deutsche Bank owns about 10% of ICICI Bank.

Rabo Bank, which until recently held 4.8% in Yes Bank, sold nearly three-fourth of its stake for about Rs 453 crore earlier this week. Citigroup recently sold its entire 9.9% stake in HDFC for about Rs 10,000 crore.

Higher voting rights will be helpful for bank promoters in the early years. Promoters of a bank are allowed to own higher stake in initial years but this has to be pared to 10% gradually over a number of years. Under the new draft banking licence norms, promoters can own up to 40% stake in the first five years but have to reduce it gradually to 15% in 12 years. Wherever promoters hold more than 26% stake in a bank, there voting rights will be capped at 26%, in contrast to 10% at present, a senior banker said.

As of March 2012, promoters holding in Kotak Mahindra Bank is the highest at 45.32%, followed by Yes Bank at 26.13%, IndusInd Bank at 19.46% and Development Credit Bank at 19.20%. Kotak Mahindra Bank and Yes Bank were allowed to have 63% promoter shareholding when they got licences. The RBI is pushing promoters to cut their shareholding to 10% going forward.

The central bank will unveil the final guidelines on new bank licences as soon as possible, a senior government official said. The process of inviting applications could begin in the second half of the current fiscal, with the government keen to issue half-a-dozen bank licences by April-end. This will kickstart the financial sector reform process, which has been stalled for long. We plan issue some licences within this year, the official said.

The Cabinet approval has paved the way for RBI to be given additional power to supercede the bank board and call or information from associate companies of promoting entities. RBI had held back final guidelines on new banking licences pending inclusion of these provisions in the Banking Regulation Act.

Religare Enterprises group CEO Shachindra Nath said new entrants in the banking sector would bring in fresh capital, which would help in ensuring the projected 20% year-on-year rise in bank credit. Since demand for credit is 2.5 times the GDP growth, entry of new players is essential to support annual economic expansion of 8%, Nath said.