With 'restrictive' norms, not many takers for small finance bank licences

Ask H P Singh of Satin Creditcare Networks on his small finance bank (SFB) ambitions, and he will tell you: “It is on-tap, and we are in no rush to seek a licence”. Singh may not admit to a rethink, but the founder-chairman and managing director of Satin had been the first to go public on such an ambition even before the central bank’s final SFB norms were out. You can hold him to it, but he is not in a majority of one when it comes to on-tap SFB licences.
 
Word is out that there will be relatively few takers for SFB licences compared to the 72 applicants who lined up in February 2015. SFB-Version 2 guidelines are seen as restrictive; and if grapevine is to be believed, the central bank may also want it this way! Perhaps it is the reason why  the central bank has said that those who are turned down can seek redressal from its board no less! (see box: Change in procedure for RBI decisions).
 
Tough to dribble past
 
Payment banks or their promoters are eligible to apply only five years after being in business, but the draft guidelines were mum on this aspect. SFB promoters are to hold 40 per cent of the paid-up voting equity capital of Rs 200 crore (up from the Rs 100 crore in the first round) during the first five years. And despite the lower thresholds in the case of conversion into SFBs by urban cooperative banks (UCBs), few are seen pumping in Rs 100 crore for a 26 per cent stake in UCBs.

SFB promoters also have to cut stake to 30 per cent within 10 years; and to 15 per cent within 15 years. This is a departure from the earlier position when they had to reduce it to 30 per cent within a decade, and only to 26 per cent within 12 years. The added worry here is that a promoter’s exit will be subject to the central bank’s and the Securities and Exchange Board of India’s comfort.
 
“Why should I put in this kind of money if even my exit is not assured, not that I would necessarily want to do so”, says a banker. His other peeve is that foreign capital is not allowed like in the case of universal banks. After all, the RBI has allowed a 51 per cent equity stake in Catholic Syrian Bank to  Prem Watsa’s Fairfax Financial Holdings. Adds the banker: “The central bank says large corporate groups will not be allowed, but also mentions that deciding this will be in its domain. So, am I to touch base with the promoter of a large business group and ask him to back me or not?”. And Alternative Investment Funds will also not be allowed to invest.
 
Not only big corporate groups, but government-owned entities  also can’t make a play for an SFB licence (India Post which has a payment bank, is technically out of the game). It is surmised the reason for this is over time, state-run banks are to be privatised. So, why create new entities funded by the tax payer? As for professionals, there are not many who have Rs 200 crore to set up an SFB with a track record in financial services to boot – which is a must.
 
In the case of payment banks, it is unlikely the central bank will allow them an easy pass to being an SFB merely because they feel that the current business model is not flying. After all, these players had opted to be one after having done their homework; you simply can’t chase what you think is the fashion of the day, and seek a licence for another platform.

Difficult for UCBs too
 
The big bet was on UCBs making the cut. Mahesh Ramamoorthy, managing director, banking solutions at FIS is polite when he says: “There could be an issue with UCBs converting to SFBs. The financials of UCBs may be a cause for concern” even as he adds: “But it is also true that some of the smaller and better-run ones may make the cut given the niches they work in”.
 
While the new norms for UCBs on the cards will force them to either comply with the Banking Regulation Act (1949) or remain within the exclusive fold of the Registrar of Co-operative Societies (RoCS), it is their financials which are in question.
 
The RBI’s report on The Trend and Progress of Banking (2017-18) says 36.17 per cent of scheduled UCB loans are in the largest ranges between ₹1 and ₹5 crore and above ₹5 crore. Punjab and Maharashtra Co-operative Bank (PMC Bank) alone had an exposure to HDIL of Rs 6,500 crore, or 73 per cent of its loan-book of Rs ­­­8,880 crore. There is nothing to suggest that other UCBs may not have large exposures well above the ranges mentioned by the central bank. It is more worrisome because the figure of 37.17 per cent was taken from the R Gandhi Committee report which had compiled the data for FY15! Simply put, systemic data on UCBs in public domain can be questioned as on date. Or the ratings of these banks with a large number of them falling in the À’ to ‘C’ categories, according to the central bank.
 
Through the maze
 
So, what are you to make of the SFB on-tap licence policy? The central bank is essentially mainstreaming entities, be they microfinance institutions (MFIs), or UCBs. “If they succeed as SFBs, their desire to become a universal bank is to be considered anyway. Basically, the flight-path is clear for them”, says Sanjoy S Datta, Partner-Deloitte Financial Services (India). Yes, house-keeping appears to be a driver.

You have 1,551 UCBs (54 of which are in the scheduled category), 56 regional rural banks, 96,612 rural co-operatives, plus three local area banks (which can also aspire for an SFB licence). All of them were set up to meet the needs of financial inclusion at various points in time, but time is now being called on these experiments. Then you have a dozen state-run banks (after taking into account the mergers which are to be effective April 1, 2020), 21 private banks, 45 foreign banks, 10 SFBs and six payment banks. There is no way any central bank can keep an eye on so many entities — whether regulated and supervised solely by it or not. The blowout at the Infrastructure Leasing & Financial Services, PMC Bank, and the ensuing change in regulations have rearranged the chessboard completely.
 
Says Supreeta Nijjar, vice-president and sector-head, corporate sector ratings at ICRA: “The liquidity crisis since the last one year and the risk aversion to non-banking financial companies may prompt many of them to explore the SFB model to address the liabilities issue. Hence, we expect strong response for applicants seeking an SFB licence”.
 
But then, getting past the central bank’s gates is another matter. Who wants to be a banker?

Change in procedure for RBI decisions
 

In the guidelines for on-tap SFB licences, an applicant who has not been found suitable for a licence will be informed about the central bank’s decision. Such applicants will not be eligible to make an application for a licence for a period of three years. Those aggrieved by the decision of the Committee of the Central Board can appeal to the Central Board of Directors within a month of the date of receipt of communication from Reserve Bank of India (RBI) on an application not being considered. This is a departure from the first round of SFB licences (not on-tap) when nothing by way of redressal was on offer (November 27, 2014). It merely said: “… it may not be possible for the RBI to issue licences to all the applicants meeting the eligibility criteria prescribed above. RBI will adopt a cautious approach in licensing small finance banks in the initial years, and with experience gained, may suitably revise the approach”. The point is: Can there ever be a situation wherein the central board committee’s decision is overturned by the RBI’s central board of directors?