New bank licences: Tough obstacle ahead, says Fitch

Says few applicants would develop into substantial banks

Global rating agency Fitch today said only some of the 26 entities which had applied for a banking licence would be able to develop into a substantial lender, due to the tough requirements. Among the conditions for a new licence are opening of 25 per cent of branches in rural centres and adhering to the cash reserve ratio (CRR), statutory liquidity ratio (SLR) and priority sector lending (PSL) norms from the inception.

"We believe some entities will find the 40 per cent PSL target tough, though they have around three years to meet these," said Fitch in a report issued today.

"Infrastructure finance companies with large existing loan portfolios that have little or no prior presence in the required sectors are likely to find the target most challenging." IDFC and Srei Infrastructure Finance are among those which have applied from this sector.

Fitch said RBI's objective of financial inclusion would make heavy demands on profitability and capital and this was likely to increase the time taken for a successful applicant to establish its presence. Profitability would be limited until they secure a strong foothold, the report added.

Asset finance applicants could leverage their existing customer base but these were largely unbanked, Fitch said.

Magma Fincorp has applied; so have L&T Finance Holdings and Shriram Capital, the holding companies of L&T Finance and Shriram Transport Finance.

A couple of microfinance institutions, Bandhan Financial Services and Janalakshmi Financial Services, which serve unbanked populations, have applied.

"Successful applicants are likely to be those with financial firepower and strong management to handle the transition and growth," the report said. The guidelines limit the competitive advantage for established non-banking financial companies due to high entry barriers and regulatory restrictions.

Therefore, the number of applicants is less than the market had expected, Fitch said.

Mahindra Financial Services, an NBFC from the Mahindra Group, had withdrawn, citing the tough norms.

For stronger NBFCs like IDFC, a bank licence might add diversity and allow greater operational and funding flexibility over the longer term. According to Fitch, established NBFCs are better placed to switch to bank status. However, to move away from their core competencies and well managed operations into new businesses and unfamiliar risks, with additional regulatory hurdles, might put pressure on their capital, Fitch said.

According to the agency, the new banks won't increase competition in the medium term because of additional profitability pressure from their expansion plans and the financial inclusion conditions. " New entrants may bring some much-needed innovation to a sector where only around 50 per cent of households have access to banking services" Fitch said.

"It is unclear how many applicants will meet the RBI's selective criteria and will be granted a licence," it added.