High asset price volatility clause may be a hindrance

One criterion listed by the Reserve Bank of India (RBI) for granting fresh banking licences could be a hindrance to property developers and broking firms seeking to enter the sector. RBI, in its circular, said the business model of promoter groups applying for the licence should not put the bank at risk on account of activities which are speculative or subject to high asset price volatility.

Although RBI did not exclude any sector in the guidelines, the wordings in the circular have raised concerns on whether real estate and broking firms would qualify. Both these business are considered volatile, as stock markets and real estate are known to have a speculative element in them.

Officials at real estate firms and stock brokers feel the central bank is unlikely to place a blanket ban on applicants in both these sectors. But, it would shortlist on the basis of the nature of earnings. “If the majority of a group’s business is coming from such ventures (speculative and assets with high price volatility), then they should not be allowed,” said Rajeev Bairathi, director (investment advisory), DTZ India, a property consultant. “But if a minor portion comes from these, then it should not be a problem.”

India’s real estate sector has seen a surge in activity in the last many years as the economic boom boosted investors’ demand for property. Steady real estate prices have prompted many to buy a second home as an investment avenue.

“Real estate in cities such as Mumbai or the national capital region (NCR) is speculative and companies from such cities will not qualify automatically,” said the director of a Mumbai-based real estate fund, who did not wish to be identified. While Mumbai-based Oberoi Realty, a debt-free property developer, has evinced interest to apply with RBI, New Delhi-based DLF, India’s largest real estate firm, said it was not keen on a banking foray.

Some said developers with good financials and exposure to markets with lesser volatility in prices could pass muster. “If you look at the Bangalore, Chennai and Hyderabad markets, they have hardly seen a jump of 10-12 per cent in the past 10 years. So, there are many markets and players which are subject to less volatility,” said J C Sharma, managing director of Bangalore-based Sobha Developers.

Stockbrokers are more optimistic about the prospect of some of them securing a licence. “It would be logical for large broking houses that have substantial NBFC (non-banking financial company) businesses to apply to have well-rounded operations,” said Krishnakumar Karwa, managing director, Emkay Global Financial. “I believe some of the larger broking houses would definitely contemplate applying for the licence.”

Firms such as Religare, IIFL and Edelweiss are said to be interested to venture into banking. However, some brokers said RBI is unlikely to allow firms with proprietary trading to get into banking.

“Broking is generally an agency business and is not risky. But if they have huge prop trading business, the risk is huge. Such businesses will not get the licence,” said the managing director of a larger stockbroker.