Wednesday, August 11, 2010

Release of Discussion Paper " Entry of New Bank in Private Sector" by RBI

Today RBI (Reserve Bank of India) released \discussion paper pertaining to issuing Banking license to Corporates/ Companies / NBFC..
This discussion paper is released by RBI to get feedback and suggestions from Industry, Corporates, Investors and Consumers. RBI intends to have feedback on

a) Capital Requirements of the bank
b) Shareholding structure of new banks (Promoters, Foreign Banks, Cap on shareholding etc)
c) Should Corporates and Industrial houses be given banking license
d) Can NBFC covert in bank or Promote bank
e) Business models of Banks.

We can say it intend to have feedback on ownership and guidelines of banks.
The Salient features of this paper is as follows

a) RBI feels the need for more banks in India and it feels that there will be ample business and space for all banks also after issuing new license but RBI is focused on financial Inclusion and inclusive economic growth.
b) RBI found that licenses issued in past had some lessons to learn. GTB became bankrupt, Centurion bank was merged. Yes bank was sold off by promoter. There were governance issues with Bank of Rajastan also small banks and local banks struggling to grow.

b) It feels that "Only those banks that had adequate experience in broad financial sector, financial resources, trustworthy people, strong and competent managerial support could withstand the rigorous demands of promoting and managing a bank."

c) Several committees have suggested Investment by corporates and Foreign banks be hiked from 10% to 15%

c) RBI is prepared to issue banking license to corporates, Industrial houses and NBFC to promote banks.

d) Dr Raghuram Rajan has suggested there need strict regime of Related party transactions, Lending in Group companies and concentration of Loans

e) RBI is wary of recent financial crisis and it want to avert any future crisis of such nature, it wants to avoid cascading and spill over effect of crisis of one bank to another and one corporate into a system.

f) It also gave banking scenarios in other geographies, broadly there is no restriction on percentage of shareholding by promoter (USA, UK, FRANCE, Japan and European union) or may need regulatory approvals.

g) The promoters of the new bank will have to mandatory list shares of the bank.

There are some issues for considerations which are

a) RBI is not clear on allowing banking license to Residuary Non banking company (RNBC), They may also ask for it (They are well networked) and they can boast of financial inclusion because they have penetration in Interiors and low earning groups .(Sahara and Peerless: I perceive they may also want a license)

b) India gives only full banking license, hence the business model will be universal banking and profit motivated but RBI can put restriction on percentage of urban branches and some control on lending

c) Promoters holding should be at satisfactory level to make them interested in business models and returns, 40% stake is an acceptable answers with lock - in , they should be allowed to buy shares to maintain stake holding in case of equity dilution. ( I am sure promoters would try to reduce stake in long run to capitalise the gains made on stocks

d) Only Corporates or NBFC be given license and not to any individual or group of Individuals who may have required domain and capital.. If Licenses are given to corporates, they should not have past issues in corporate governance (Not only the company, but whole group companies should be included)

I agree that banking licenses should be given to corporates and they should get same treatment and with other banks.

Now let us understand , How many companies are there in fray who have directly or indirectly said that they are eligible for a banking license or The markets perceive them to be a contender

a) IFCI 
b) Lic Housing Finance
c) Gic Housing Finance
d) Reliance Capital Limited
e) Shriram Transport Finance
f) M& M Financial Services
g) L&T Finance
h) Aditya Birla Nuvo
i) Srei Infra Fin
j) Religare Enterprise
The Capital Requirement of Rs 300 crores is very less and we will see the list getting bigger.

The hype build on share prices of such stocks should be looked it with pinch of salt because 

a) Getting a banking license will take another 6 months at least

b) Banking license will not assure good returns and there will be big gestation period

c) There will only be few license but the queue may very big (Beware there may be many who will just talk)

b) There will be many players in the fray (as with Telecom license) and Corporates / NBFC  may need capital, Expertise, Good background and political blessings.

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