New bank licences

After years of intense lobbying, business houses wanting to set up banks are spotting a ray of hope. The Reserve Bank of India is slowly opening the doors for corporates to enter the highly-regulated industry, but with caution, conditions and caveats. In draft guidelines issued on Monday, the banking regulator laid down the broad rules of the game: finance companies can be converted into banks, and promoter groups with “sound credentials and integrity” and a 10-year record of successfully running their businesses can set up banks. Such banks should have a minimum paid-up capital of Rs 500 crore, run 25% of their branches in rural unbanked regions, list within two years, and be owned by a separate holding company that cannot borrow money to float the bank. Total foreign holding in the bank cannot cross 49% while the operating company must lower its stake to 20% by 10 years. Corporates may find it easy to meet most conditions, but the RBI has spelt out it will be “very selective” and have the last word. “…it may not be possible to issue licences to all the applicants meeting the eligibility criteria…,” said the draft note. A key pre-condition is changes in the Banking Regulation Act to empower the RBI to supersede bank boards and block purchase of 5% or more shares if the investor is not “fit and proper”. India Inc, nonetheless, is excited. Reiterating the Aditya Birla Group’s “strong intent to enter banking”, Chairman Kumar Mangalam Birla said it was a “forward step” while Bajaj Finserve MD Sanjiv Bajaj said the guidelines were “practical” and “Bajaj Auto and Bajaj Finserve are eligible”. A senior Tata Group official said it was a “positive” move.
The Hurdles
No new licence till laws change to give RBI more power
Negative feedback from other regulators can dash chances
Comments from CBI, ED & other govt agencies can backfire
The Race
Tatas, Aditya Birla group, Bajaj, L&T, LIC Housing, M&M, Shriram group, Reliance, ADAG, PFC, IFCI, Religare, Srei may be interested Edelweiss with active broking biz may lose out; IDFC & IndiaBulls said they are not interested in banking
The Rules
Paid-up cap of Rs 500 crore, listing within 2 years
No foreign entity/NRI can hold over 5% shares
Biz groups will have to float a holding co to own bank & other financial services like insurance, broking etc