Mahindra Fin opts out of bank race, blames rules

As the deadline to apply for the banking licence to the Reserve Bank of India (RBI) draws closer, the race for banking licence is heating up and so is the discontent over the guidelines, especially among non-banking financial companies (NBFCs).

While SREI Infrastructure Finance informed BSE that it will be applying for a banking licence, Mahindra & Mahindra Financial Services said it is no longer interested in setting up a bank.

Mahindra Finance slammed the guidelines, saying they were adverse for larger NBFCs such as theirs, and more expensive.

The guidelines ask for cash reserve ratio and statutory liquidity ratio requirements from the beginning, even though banks take time to set up a deposit base, the company said in a statement. “This anomaly, unfortunately, will impose an undue penalty on large, successful asset finance NBFCs with a pan-India network that wish to convert into a bank, as compared to a small NBFC with a limited network.”

RBI has always given an impression that it is more keen to convert large NBFCs into new banks than provide licences to corporates. But experts say the clarifications on the guidelines imply otherwise.

“The guidelines and the clarifications seem to be far more onerous and difficult to NBFCs compared to the corporates. You are getting an impression that this time around RBI is more eager to give licences to corporates over NBFCs,” said Ashvin Parekh, national leader, global financial services at Ernst & Young.

Shriram Group, a frontrunner for a banking licence, concurred with Mahindra & Mahindra Finance. “It is difficult for a large NBFC to comply with the guidelines and if you are a large retail NBFC, the challenges are more,” said group director G S Sundararajan.

“Larger the business, more the complexity. Expenses will rise and profits will come down in the short term,” said Sundararajan.

Bajaj Finance and L&T Finance are among the NBFCs in the fray for a licence.
According to a person close to the matter, Bajaj Finance has already submitted its application, while L&T Finance will do it before the deadline.

However, it is not going to be easy for either of them. Larsen & Toubro, L&T Finance’s parent, will have to reduce its shareholding to 49% from the current 82% to become eligible for a licence.

RBI guidelines mandate at least 51% public shareholding in the holding company.

Bajaj Finserv, on the other hand, has not done much on providing basic financial services to rural India and focussed on serving affluent customers; something that could go against it.

Religare Enterprises, Reliance Capital and Tata Capital are expected to submit their application soon.

Meanwhile, corporates are also gearing up apply for a new banking licence. Videocon Industries will submit its application on Tuesday, chairman Venugopal Dhoot said.