Dalal Street sees very few new banking licences

The Reserve Bank of India Reuters

Will a large industrial group get a banking licence, finally?

After years of a firm, ‘NO’, the Reserve Bank of India (RBI) has put up a discussion paper on issuing new banking licences that at least talks about scenarios, weighing the pros and ocns of such a move.

The discussion paper adds large doses of cautionary hypotheses, which, analysts say, would mean there’s unlikely to be an open sesame kind of situation.

The RBI has also said that if corporate houses are to be given licences, there has to be amendments to various statutes and acts.

“It is not going to be that easy. I would actually associate chances of corporate houses getting licence to be very minimal. Maybe one out of many applicants would get a licence at best. Even that is going to be very strictly monitored. There would be high levels of constant due-diligence,” said Suresh Ganapathy, head of financial research team at Macquarie Securities.

There are several deep rooted fears in allowing industrial and business houses to own banks, the paper said.

Conflict of interest, concentration of economic power, likely political affiliations and potential for regulatory capture were some of the concerns listed by the RBI.

“When banks are flush with liquidity, there is a great risk of diverting the funds to liquidity constrained operations of the group,” the paper said.

The paper said companies and even non-banking financial entities directly or indirectly involved in real estate should not be allowed to promote banks.

As an intermediate step, industrial and business houses could be allowed to take over regional rural banks, the paper said.

But analysts also feel that the tight licensing regime of the past is changing for better.

“For the first time, there is a discussion on allowing industrial outfits. So there is a slight change. Earlier they were completely closed to the idea. Now there is some openness,” said Vaibhav Agrawal, vice-president (research), Angel Broking.

The RBI has invited suggestions from banks, non-banking financial institutions, industrial houses, other institutions and the public at large on six aspects.

These are: minimum capital requirements for new banks and promoters contribution (net worth of Rs 500 crore or Rs 1,000 crore), minimum and maximum caps on promoter shareholding and other shareholders, foreign shareholding in the new banks (50%), whether industrial and business houses could be allowed to promote banks, should non-banking financial companies be allowed conversion into banks or to promote a bank and business model for the new banks.

RBI listed three options, namely having a low minimum capital requirement but above Rs 300 crore, a minimum requirement of Rs 1,000 crores, and that of Rs 500 croreswith a condition to raise the amount to Rs 1,000 crores within five years.

Suggestions are welcome till September 30, 2010, the RBI said in a release.

The discusion paper comes about six months after the finance minister Pranab Mukherjee, said in his Union Budget 2010-2011 speech on February 26 that in order to extend geographic coverage of banks, the RBI is considering some additional banking licenses to private companies and non-banking finance companies.

On February 26, just a few hours after the budget speech, large corporates like the Anil Ambani Group and the Aditya Birla Group had shown interest in going for a banking licence if the guidelines allowed them to.

In the last six months, the list of contenders has increased to include names such as Bajaj Finserv, IFCI, Exim Bank, Sidbi, Shriram Group, Srei, Religare, LIC Housing Finance and Indiabulls.

But the discussion paper is clear companies with real estate linkages should not be allowed to set up banks.

That could impact the aspirations of both Indiabulls, LIC Housing Finance, though LIC Housing may get the benefit of its redoubtable parentage.

The RBI said it fears for financial stability if an industrial house that is involved in real-estate also establishes a bank.

Given the sensitivity of the real-estate sector, any sub-version of the Chinese wall between the bank and rest of the group could have extremely negative consequences for financial stability, the RBI said.

Individual promoters are unlikely to get another shot at what’s a lucrative business.

“The RBI has very clearly said that in the past lot of these individual promoters who had got licenses had really done a bad job. For example the Centurion Bank, Bank of Punjab, Global Trust Bank, all these guys failed. Now it will be very cautious,” said Ganapathy.