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Global rating agency Fitch today said that only limited numbers of 26 applicants would receive licences and develop into substantial banks due to tough requirements.
Among the conditions for new bank licences are opening of 25% branches in rural centers and adhering to cash reserve ratio (CRR), statutory liquidity ratio (SLR) and priority sector lending (PSL) norms since inception of the bank.
“We believe some entities will find the 40% PSL targets tough, even though they have around three years to meet them” said Fitch in report released 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” it said.
Among the infrastructure finance companies, IDFC and SREI Infrastructure Finance has applied for the license to central bank.
Fitch also said that RBI’s objective of financial inclusion will have heavy demands on profitability and capital which is likely to increase the time for 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 it is largely unbanked, Fitch said.
Among the asset financing companies Magma Fincorp has applied. L&T Finance Holdings, Shriram Capital – the holding companies of L&T Finance and Shriram Transport Finance have also applied for the license. Couple of microfinance institutions – Bandhan Financial Services and Janalakshmi Financial Services which serve unbanked population 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 (NBFCs) due to high entry barriers and regulatory restrictions. Therefore number of applicants is less than market’s expectation, Fitch said.
Reserve Bank of India on Monday had said that it has received 26 applications for new banking licences. Mahindra Financial Services – non banking financial company (NBFC) of Mahindra group had withdrew from the race citing tough norms.
For stronger NBFCs like IDFC - a bank licence may 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 may put pressure on their capital, Fitch said.
According to the agency new banks won’t increase competition in 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% 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 bank license” the report added.
