On-tap banking may not see long queue for licence

NBFCs, individuals most likely to apply

The Reserve Bank of India (RBI) has opened the doors for new players to enter the banking system. However, experts believe at least in the short to medium term, there isn’t going to a big queue of players at the regulator’s door seeking universal banking licence.

Banking analysts believe the pool of players that were likely to apply has been streamlined by excluding corporate entities. Moreover, stringent regulatory framework applicable to a bank such as meeting priority-sector lending norms, focus on financial inclusion and statutory requirements are also going to serve as deterrent.

“Priority sector requirement is a big challenge and we need more preparations to convince our investors before we take up the responsibility of meeting priority sector commitment. There would be a concession period but we need to figure out how we would be performing in that period, so that we can give adequate return to our investors,” said V P Nandakumar, managing director and chief executive officer (CEO) of Manappuram Finance. The non-anking financial company (NBFC) is looking at applying in the next three or four years.

Even though some large NBFCs will be interested, not all of them will rush to apply. “We don’t see many NBFCs converting into banks, given the stringent guidelines and statutory norms. Thus, though on-tap, licensing will be limited,” said a research report by Religare.

Some other large NBFCs such as Bajaj Finserv and Mahindra & Mahindra Financial Services are going to get excluded because they are part of larger corporates and, as a result, do not fit the bill.

Abizer Diwanji, national leader (financial services) at EY India, explained that considering that the gestation period of the business is long, players will take their time out and chalk out the plan and apply only after that.

LICENCES ON TAP

• Resident individuals having 10 years of experience in banking and finance at a senior level can apply for licence
• Corporate entities to be excluded but they can hold 10% stake in a bank
• NBFCs converting into banks should do so through a holding company structure
• Minimum capital requirement is Rs 500 crore
• Experts say there would be no rush to apply for licence
• Gives scope to companies for long-term planning before applying for licence
• Meeting priority-sector lending to be a daunting task for new banks
• Big cooperative banks best suited to become universal banks

“It takes at least two-three years to have the start of a stable deposit base. But, as soon as an entity becomes a bank, the priority-sector obligation starts getting counted and that itself can make the bank a loss-making proposition. If you don’t have a particular scale, meeting priority-sector challenges can be quite daunting and NBFCs need to do serious research,” he added.

The central bank has clearly stated that financial inclusion has to be one of the key objectives. Experts say considering there are 10 small finance banks (SFBs) and at least eight payments banks players that will also be focused on this space, competition is going to be significant. Profitability challenges for any of these new players will increase further.

Banking experts believe the latest guidelines are also mainly directed towards individual professionals, who have relevant experience to start banking operations in India. Says Ashvin Parekh of Ashvin Parekh Advisory Services: “I believe the guidelines are favourable towards professionals, who  will bring in good global practices and new ideas into the sector.”

While the guidelines say the key executives or promoters have to be ‘Indian residents’, experts say it will not be much of a hindrance because people like ex-Citibank chief Vikram Pandit or Anshu Jain (former co-CEO of Deutsche Bank) would most likely be in non-executive roles as chairperson. In fact, sources suggest some Indian bankers with foreign experience are already in talks with top legal brains in the banking sector to structure such deals.