NEW BANKING LICENSE - TEXTURE OF INDIAN BANKING TO CHANGE

By Ruma Dubey & Geetanjali Kedia

Well, how would it feel to walk into an L&T Bank or Reliance Bank or even Shriram Bank in the next few months? Or maybe you are using an Airtel mobile to complete transactions with your Bharti Bank. How does it sound – living in an Indiabulls home and banking also with Indiabulls? Surely, banking in India will undergo a sea change over the next few months!

The much awaited final guidelines for issuing new banking licenses, allowing private and the public sector and more importantly, NBFCs to set up banks has been released by RBI.  Though the document is silent about how many licenses will be issued or rather how many banks will be allowed to come up, RBI has very specifically laid out the norms.

A quick look at the guidelines:

• Will allow applications for new bank licences until July 1, 2013
• Unlike the 2011 guidelines, does not exclude companies from any specific industry from applying for a new bank licence
• Entities / groups in the private sector, entities in public sector and NBFCs shall be eligible to set up a bank through a wholly-owned Non-Operative Financial Holding Company (NOFHC).
• Companies should have a past record of sound credentials and integrity, be financially sound with a successful track record of 10 years. For this purpose, RBI may seek feedback from other regulators and enforcement and investigative agencies.
• Minimum voting equity capital requirements for banks - Initial minimum paid-up voting equity capital for a bank shall be Rs.500 crore.
• Shareholding - NOFHC shall initially hold a minimum of 40%  of the paid-up voting equity capital of the bank which shall be locked in for a period of 5 years, to be brought down to 15% within 12 years.
• Listing – Bank shall get its shares listed on the stock exchanges within three years of the commencement of business by the bank.
• Foreign shareholding - The aggregate non-resident shareholding in the new bank shall not exceed 49% for the first 5 years after which it will be as per the extant policy.
• Corporate governance of NOFHC - At least 50% of the Directors of the NOFHC should be independent directors.
• Prudential norms – Applicable to NOFHC both on stand-alone as well as on a consolidated basis and the norms would be on similar lines as that of the bank.
• The NOFHC and the bank shall not have any exposure to the Promoter Group. The bank shall not invest in the equity / debt capital instruments of any financial entities held by the NOFHC.
• The Board of the bank should have a majority of independent Directors.
• The bank shall open at least 25% of its branches in unbanked rural centres (population upto 9,999 as per the latest census)
• The bank shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic banks.
• Banks promoted by groups having 40% or more assets/income from non-financial business will require RBI’s prior approval for raising paid-up voting equity capital beyond Rs.1000 crore for every block of Rs.500 crore.
• Any non-compliance of terms and conditions will attract penal measures including cancellation of licence of the bank.
• Existing NBFCs, if considered eligible, may be permitted to promote a new bank or convert themselves into banks.

In these guidelines, three provisions will be seen to be quite onerous Viz:

1. Stake of Promoters to be brought down to 15% in 12 years.
2. Opening of a tleast 25% branches in unbankable rural area, which will be seen quite expensive, loss making and seen discharge of financial inclusion obligations of the Govt., by the private sector.
3. To get the bank listed within 3 years of starting its operation.This will result in getting lower valuations, as majority of these banks , may not be seen profitable within three years.

The existing private sector banks, having no identifiable promoter or promoter having very low equity, will be seen as hot M&A play, as licencee of new banking licence, will eye to acquire them , once they are  allotted banking licence.

Companies expected to queue up for the banking license

We expect to see about 40 applications coming in, to RBI for new banking licences. However, we expect RBI to just allot 5 licences , in the first place, which will be based on the region. So, one from each region viz. Eastern, Western, Northen, Southern and Central,  are likely to get the licences.

Prospective applicants are likely to be:

1. L & T Finance
2. Mahindra & Mahindra Financials
3. Aditya Birla Nuvo
4. Bajaj Finserv
5. Reliance Industries
6. Shriram Transport
7. Religare Enterprises
8. Indiabulls Financials
9. Cholamandalam Investment & Finance
10. SREI Infra
11. Power Finance
12. Rural Electrification
13. LIC Housing
14. Dewan Housing
15. Tata Inv. Corporation
16. Reliance Capital
17. Bharti Group
18. Sterlite Group
19. Sundaram Finance
20. IDFC

Applicants in serial number 1 to 7 , have good chances of getting licenses allotted to them by RBI.