Tough banking licence norms may keep many aspirants out

Large firms with good record in corporate governance may score over NBFCs & PSUs

The Reserve Bank of India’s (RBI) norms on new bank licences may not have discriminated against any particular category, but its stringent conditions would most likely keep non-serious players out of the fray. Given that financial inclusion should be the core of their strategy, aspirants for new bank licences will have to be prepared for a long haul before they hit the profitability highway. For instance, non-banking financial companies (NBFCs) enjoying high margins will have to be willing to sacrifice such growth and profitability as the norms that govern lending operations of banks are far more stringent than those of NBFCs. Also, if NBFCs have a lending business that can be carried out by a bank, then they would have to convert into a bank, if granted licence.

So, while RBI has thrown open the door to all categories, it requires the new banks to open at least 25 per cent of branches in unbanked rural centres (population up to 9,999 according to latest census). The new norms do not give any relaxation on capital adequacy, statutory liquidity ratio (SLR) and cash reserve ratio (CRR). Given that the new banks would be competing with existing ones, garnering deposits would not be easy for them either. Such stringent norms would discourage many from applying for a licence. According to Ambit Capital, “The guidelines do not talk about any exemptions for new banks on other regulatory requirements. Hence, given the regulatory costs (SLR, CRR and priority sector requirements) of converting an NBFC into a bank, many promoters who are already running successful NBFCs will think twice before applying for a banking licence.”

Also, the central bank has stipulated against monetisation of licences which would prevent promoters from divesting their stake to other parties for windfall gains. Emkay Global’s banking analyst Pradeep Agrawal believes there are two important criteria that would keep non-serious players out of the fray. First, he says, since the licences cannot be monetised many may stay out. Secondly, listed entities which seek to convert into a bank should have public shareholding of 51 per cent. This may keep Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) out of the race. Also, analysts say quasi public sector NBFCs like PFC, REC and IDFC have been created with a “special purpose” and if they convert into a bank, then the purpose is defeated. Besides, infrastructure lending is very different from the kind of lending banks undertake.

Given that no more than four to five licences would be issued in this round, analysts believe RBI may show a bias towards large corporates with good track record in corporate governance and deep pockets.