5 reasons corporates are exiting the new bank licence race

After Videocon, the Tata Group has withdrawn its application to the RBI for a banking license

The Tata Group has called off its plans to set up a bank by withdrawing its licence application. They follow Value Industries promoted by Venugopal Dhoot, which had earlier withdrawn its application while Mahindra & Mahindra too had announced it was not applying for a licence as guidelines did not favour large non-banking financial companies like Mahindra Finance.

 

Tata group said in a statement that it found RBI’s model requiring aspirants to move financial services to a holding company as a hurdle, as the current model being used by the group gave it more flexibility. 

 

Applicants have also in the past expressed fear about higher capital requirements, stringent priority sector lending norms and rules on promoter shareholding as key deterrents. 

 

What are some of the other macro concerns that applicants could be harbouring? 

 

Shinjini Kumar, Director (banking regulations) at PricewaterhouseCoopers lists out in detail 5 key apprehensions - 

 

#1 Licences are ‘on-tap’ anyway, so why not wait for the right time?

 

Between the idea of granting new bank licences and the execution of the idea, much has changed in the global and Indian economic environment. The banking sector is struggling with large NPAs as the economy faces headwinds, with no clear end in sight. It is hard for existing banks to pick up good creditworthy customers. Part of the reason for attractiveness of banking as a business has been the scarcity value of bank licences and the fact that granting of bank licences is a once-in-a decade type of event. With the entire positive buzz around 'on-tap' or more frequent licensing, that uncertainty goes and applicants can time their entry based on market dynamics rather than the opportunity window. 

 

#2 Guidelines too prescriptive, no flexibility a handicap 

 

The guidelines for licensing of new banks has laid out in detail the type of bank that applicants are required to build. Everything from urban to rural branch ratios, technology, governance, structure, products is prescribed either in generic or specific terms. The leeway to create a differentiated model is very limited due to this. However, this model is somewhat untested as no bank in India has actually operated with the branch ratio prescribed under the current licensing guidelines. While some applicants may actually be able to come up with game changing ideas to do viable inclusive banking, some may want to create their niche in other segments. The discussion around differentiated licensing may provide hopes of a better fit between the aspirations of a promoter institution and the business model of the bank. Even for applicants capable of game changing strategies, lack of flexibility on liability side distribution is a big handicap to developing cost effective models. 

 

#3 Is the cost structure viable? 

 

The idea for granting additional bank licenses was mooted in times of high growth and optimistic growth projections. Between 2010 and 2013, business plans had to be revised what with growth forecasts being downgraded. With further delays and implementation lags, costs may go up further. Many of the applicants have successful, profitable non bank finance businesses, which are required to be killed before the bank becomes operational. While long term outlook on Indian banking continues to be positive, this income volatility, in times of uncertain growth can be uncomfortable. 

 

#4 Differing rules for different banks?  

 

For historical reasons, the timing of the licences seems to have become a critical success factor in Indian banking. We have old private sector banks, new private sector banks and the proposed new private sector banks. The current sets of rules are already different from those applicable to banks licensed in the past. If licensing norms are indeed changed under the 'on-tap' licensing regime,the question is whether the current applicants will still be held to the standards proposed under the business plans in 2013? 

 

#5 Too much scrutiny 

 

There is high level of trust in the institutional integrity of RBI. The necessity to maintain that trust has led to a detailed and transparent process, where key developments are shared by the RBI like never before. In the days of aggressive media and relentless public scrutiny, this itself can cause concerns. In addition, the timing of new bank licences and the next general election may appear too close for comfort.