If feedback leads to policy, business houses are unlikely to get banking licences

This may well spell the end of the road for the banking aspirations of top corporates.

On Thursday, the Reserve Bank of India (RBI) said the gist of the feedback it got for a discussion paper on new banking licences, which was put up on its website on August 11, was to exercise caution when it comes to the entry of industrial houses into banking.

Banks who responded to the paper were also not in favour of allowing business houses due to unsavoury past experience in India and abroad.

They were also of the view that the large capital buffer that would be available to banks sponsored by industrial/business houses would create an uneven playing field with the existing banks.

The comments received by RBI include a finding which said the experience of other counties show that combining banking and commerce implies there would be a lot of connected lending.

“India does not have enough experience in supervising in a scenario when banks are owned by diversified corporates, and allowing such ownership could have serious potential disasters,” it said.

It was felt that the ownership structure of large industrial/business groups may open opportunities for regulatory arbitrage.

The discussion paper also received views where it was said that India already has a concentrated wealth structure, which influences political decisions.

Allowing industrial houses to own banks will exacerbate the concentration of economic power and political influence.

Besides banks, companies too have said that the RBI must set a high initial capital requirement of Rs1,000 crore while non-banking finance companies prefer a lower initial capital requirement of Rs300-400 crore in new banks, the RBI said.

The initial capital requirement could then be raised to Rs1,500-2,000 crore over time, said the RBI release.

It has also been suggested that the central bank issue just 20 bank licences with a minimum capital requirement of `Rs50 crore and a capital to asset ratio of 15% and above.

On shareholding patterns in new banks, industry bodies preferred promoter shareholding to be 40-51% while non-bank finance companies advocated a lower 30-40% promoter holding.
“The industry representatives were of the view that strong companies are promoter driven and therefore advocated a higher range of final stake holding of 20-26% as it would ensure long term interest and commitment of the promoters,” the RBI said.

On foreign investors’ shareholding in new banks, views were diverse even among various industry bodies, the RBI said.

Non-banking finance companies preferred foreign holding to be capped at the existing 74%.

The arguments against giving licence to industrial/business houses also pointed out that since there is no dearth of capital, existing players also could raise the required capital. As such, no additional benefit accrues by granting bank licences to industrial houses, it was said.

But there were also arguments favouring the entry of industrial / business houses. That view said financial inclusion requires higher scale of operations which the industries would be able to bring by deploying large capital.

It was also felt that industrial / business houses have the entrepreneurial and managerial talent in running asset management companies, mutual funds and insurance companies and have successfully penetrated into rural India. Due to these success stories their talent could be gainfully harnessed in the banking sector, goes this hypothesis.

Moreover, industrial houses could bring to banking strong governance practices, management expertise, talent, innovation and global best practices especially in customer service, as they have had a long history in nurturing and developing businesses, said some.