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Wednesday, May 25, 2022

Mahindra Finance opts out,Srei,Edelweiss to seek bank permit

M&M: 'Adverse impact' of eligibility criteria reason for the decision

Written by Sandeep Singh | Mumbai/ New Delhi |
June 25, 2013 2:23:37 am

The Mahindra Group on Monday dropped its plan to apply for a bank licence,potentially clouding India’s most significant financial sector reform of this decade.

Mahindra Finance,a part of the $16.2 billion group,issued a release on Monday stating the criteria set by the Reserve Bank of India (RBI) for getting the licences were “disadvantageous for large,successful NBFCs” like them favouring smaller ones instead.

The company is the second largest non-banking financial company (NBFC) in India measured by the size of core business.

As if on cue,two smaller NBFCs,Srei Infrastructure and Edelweiss Financial said they have got the go-ahead from their respective boards to apply for a banking permit.

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Other industrial houses planning to apply including Tata Group and the Aditya Birla Group are also understood to be re-evaluating their plans with just a week for the deadline for the applications to be over on July 1. A potentially strong contender,the Shriram Group,has also said it is not sure if it would be able to comply with all provisions. “We do not want to jeopardise the interests of our existing customers,” GS Sundararajan,group director,Shriram Group,and managing director,Shriram City Union Finance had said recently.

Incidentally on last Friday,the RBI issued a press statement reiterating that the date for receiving applications will not be extended but gave no reasons for issuing the same.

The Mahindras have become the first aspirants to opt out of the race,even as state-owned Power Finance Corporation and Tourism Finance Corporation are also understood to have applied for bank licences. The finance ministry has been pushing hard for giving out more bank licences and industrial groups had supported this as a major development for the economy. But the RBI has been lukewarm since the government announced the plan in Budget 2010-11.

Share prices of Mahindra and Mahindra Financial Services tumbled by up to 16 per cent after the announcement came in,but recovered later to close at Rs 236.4 with a fall of 8.1 per cent on Monday.

The group has,however,left open an opportunity for revisiting its decision stating that if RBI amends its guidelines,it may consider applying. The company had planned to apply for its banking licence through Mahindra Finance but at its board meeting on Monday decided against the same. The company claimed there was a reason for the public issue of the statement as its shareholders had the right to be informed. In its reasons the company said the regulator should have allowed for a co-existence of both the NBFC and the bank as a period of transition and claimed the criteria would have an “adverse economic and operation impact” on the group if it were to get the licence. The provisions for priority sector lending,cash reserve ratio and statutory liquidity ratio would have to be met from the start,in effect leading to higher liabilities of the applicant.

Analysts accepted that the process of setting up a bank for an NBFC would be stiff. “There had been indications that large sized NBFCs would be encouraged to migrate into the banking system. But the RBI guidelines came out as a surprise” said Ashvin Parekh,national leader,Global Financial Services,Ernst & Young.

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