Mahindra Finance opts not to seek bank licence

By Swati Pandey

MUMBAI (Reuters) - Mahindra & Mahindra has dropped plans to enter mainstream banking, suggesting that new rules intended to make bank accounts more widely available may be proving too hard for businesses to implement.

Only about half of India's population has access to banking services. The Reserve Bank of India issued guidelines in February allowing any type of company to set up a bank, seeking to improve provision.

But Mahindra & Mahindra Financial Services Ltd , which already handles loans on vehicles made by sister company Mahindra & Mahindra , India's biggest sports utility vehicle and tractor maker, said on Monday it would not seek a licence.

India, whose ratio of bank branches to adults is just a quarter of that in Brazil, has not granted a new licence for a bank since 2004, when Yes Bank was set up. The deadline for applications is July 1.

Mahindra Finance makes loans for commercial vehicles and to small businesses, and is one of many Indian non-bank finance companies (NBFCs) that are not allowed to raise low-cost savings deposits.

The company said that under the new rules it would have been forced to convert each of its 670 branches into a bank branch over 18 months, while at the same time complying with the rule that at least 25 percent of its branches are in rural areas with populations under 10,000 and without existing banking services.

"We don't want to move into banking just because there is opportunity available," Ramesh Iyer, managing director of Mahindra Finance, said on a conference call.

"The guidelines do not address the transitional issue when faced while converting a large NBFC (non-banking financial company) like ours into a banking platform," Iyer said.

The company's shares fell as much as 16.7 percent after the announcement, and ended 8 percent lower.

SREI Infrastructure Finance Ltd , Edelweiss Financial Services , Religare Enterprises Ltd and IDFC Ltd , all NBFCs, have announced their intention to apply for banking licenses.

Among India's biggest business groups, Anil Ambani's Reliance Capital has said it is keen to apply. Tata Group is also expected to apply, several newspaper reports have said, although it has never made a public statement. Reuters could not reach the MD of Tata Capital on Monday.

"The norms and the obligations are stringent, so that could be a bit of a deterrent for some players," said Nirmal Jain, chairman of brokerage firm India Infoline Ltd , whose board meets this week to consider a banking licence application.

"Only people with a long-term view and who want to invest for the long term will apply."

Industry players said a requirement that bars a newly-formed bank from investing in the equity or debt of any entity held by its holding company could also deter hopefuls.

Some critics have voiced concern that new banks could make potentially risky loans to related firms. (Editing by Tony Munroe/Ruth Pitchford)