The Reserve Bank of India’s draft guidelines for on-tap bank licensing haven’t really fired up the corporate world. Unlike in the past, there’s no hype and hoopla in the corporate sector this time over getting into the banking sector. As there is flexibility in timing an application, financial experts don’t expect any scramble for a bank licence or a long queue of aspirants.
First of all, with one stroke, the RBI has excluded most big industry groups with the stipulation that a group with assets of Rs 5,000 crore or more and non-financial business of 40 per cent or more — in terms of total assets or gross income — is not eligible. This means many top business houses including the Tatas, Aditya Birla group, the Bajajs, the Ambanis, L&T and the Mahindras may not be eligible to seek on-tap licences. The only consolation is that such large business groups can “invest” up to 10 per cent in the equity of a bank. This is only investment and doesn’t mean promoting a bank.
Second, competition is hotting up with 21 more niche banks coming up fast, giving some anxious moments to bankers. The RBI had granted approval to 11 entities for launching payments banks in August 2015 and ten entities for small finance banks in September 2015. These banks are expected to open shop in the next couple of months. “More banks are being set up. Competition is going to be tough at a time when banks are struggling with stressed assets. We need to wait for the final norms to see if any relaxation will come,” said a banking source.
In the previous round, 25 contenders were in the race for the licence but only IDFC and Bandhan Financial Services emerged successful in April 2014. The RBI has been keeping big business groups away from the banking sector for several decades now. Many industry groups had expressed interest in acquiring existing private banks in the past, but the central bank never showed any interest in their proposals. One reason for keeping business groups at an arms-length could be that the track-record of most in loan repayments has been dismal and some of them were found diverting funds.
Third, the cost has increased. “The challenges on the transition especially on CRR, statutory liquidity ratio and priority sector lending and the cost of building a new bank has only increased over time. As no special benefits are given to NBFCs for this transition, the management needs to weigh the outcomes between the cost of transition to build a bank and short term return on equity,” said an analyst with Kotak Securities.
With greater competition from existing private banks, the cost of building a bank has only increased over time, making it challenging to build a successful liability franchise like what the sector saw in HDFC, Axis and ICICI Bank, Kotak said. The RBI’s screening committee, which would look at a 10-year track record, does not have to necessarily approve all promoters who fulfill its conditions.
Fourth, rising stressed assets and dipping profits are giving nightmares to existing banks. Given the growth skewed towards high-risk segments, flagging margins and elevated credit costs, asset quality disclosures have been stepped up by private banks in the fourth quarter, but do not materially ease concerns, said a Religare report. ICICI Bank and Axis Bank had reported slippages in bad loans and lower profits in Q4. Public sector banks are expected to post more losses and provisioning in the March quarter.
In its FY17 outlook report, India Ratings has estimated that 33 per cent of corporates which have borrowed from banks are reeling under stress. These corporates form 21 per cent of system credit, of which 9 per cent have been recognised as NPA/restructured accounts in FY15, 2.5 per cent are in the process/pipeline of SDR or 5:25 refinancing, 1 per cent has been sold to asset reconstruction companies or are in talks for sale, and the balance 8.5 per cent are yet to be recognised by banks. The RBI directive to banks on making provisions for certain stressed assets has created a storm in the sector. The government is already talking about consolidation of public sector banks and bringing the government stake further down. There is a fair bit of skepticism on long-term business prospects of most small public banks, Kotak says. “We hope this would act as another business rationale to consolidate banks and defend their market share, if possible,” it says.
That said, some of the existing players in the financial sector have expressed their interest in a licence. While at least two former bankers have evinced interest in applying for a licence in their individual capacity, the requirement of Rs 500 crore capital is likely to be a hurdle, said banking sources. “The new draft is quite favourable for NBFCs. As per the guidelines stated by RBI, Muthoot Finance, in particular, is a very good candidate for getting the licence. Overall, the initial draft looks very promising and we are waiting for the final guidelines to come. We will definitely apply under this new scheme of banking license,” said George Alexander Muthoot, managing director, Muthoot Finance.
The RBI says the bank needs to comply with the priority sector lending targets and sub-targets which is similar to those of the existing banks, that too from the commencement of its operations.
The minimum capital adequacy ratio required to be maintained is at 13 per cent for a minimum period of three years and the bank would need to be listed within six years. The screening is going to be tough. The applications will be referred to a Standing External Advisory Committee (SEAC) to be set up by the Reserve Bank. The committee will submit its recommendations to the Reserve Bank for consideration. The decision to issue an in-principle approval for setting up of a bank will be taken by the RBI.