Tata's opt out of Bank Licence Race

The Tata Group called off plans to set up a bank and withdrew its licence application, implying that the Reserve Bank of India’s conditions were restrictive and conforming with them would affect its other businesses besides having to ensure that more than 1,000 units were compliant with requirements.
This follows the finance arm of another big industrial group, Mahindra & Mahindra, having dropped its plans for a licence even before the application deadline. Of India’s biggest corporate houses, only the Aditya Birla Group and the Anil Ambani-led Reliance Group now remain in the reckoning. The withdrawal by Tata Sons leaves 24 out of 26 applicants in the fray, with some of them displaying a lack of enthusiasm because of the stipulations. Value Industries of the Videocon Group is the other applicant to have withdrawn. RBI has indicated it will announce the shortlisted aspirants by January. “Tata Sons has reached a conclusion that the group’s current financial services operating model best supports the current needs of the Tata Group’s domestic and overseas strategy, and provides adequate operating flexibility to its companies, while securing the interests of the group’s diverse stakeholder base,” it said in a release.
The model suggested by RBI requires aspirants to move financial services to a holding company, one of the hurdles the Tatas cited. Bank

To be sure, a bank would have fit well with its current bouquet of financial services that include mutual funds, insurance, housing loans and automobile finance. Still, RBI’s move to make banking licensing an ongoing process rather one that operates to a deadline, gives entities the flexibility of being able to apply at a later stage if they want to, said a senior consultant who did not want to be named. Finance Minister P Chidambaram and RBI Governor Raghuram Rajan have indicated that they are looking to the new banks to drive financial inclusion across the country rather than focusing on the urban markets that are catered to by existing institutions. The move to issue differential licences may also have prompted the Tatas to pull out, said another consultant. This suggests those who want to cater to a niche area may not have to comply with all the rules.
The Tatas also cited the more than 1,000 companies in the group’s fold as yet another reason for the withdrawal. “It was impossible to complete a detailed assessment, seek the requisite approvals from various affected Tata companies prior (to) filing of our application,” the holding company said. “Some of these companies may have needed to make statutory filing with stock exchanges and call for formal board meetings to discuss this matter. For this reason, we explicitly stated in our application that any change in the legal shareholding structure will be subject to all regulatory and/or internal corporate approvals as required by the transferring company and the company whose shares are being transferred.”
One of the reasons for the withdrawal may have been the challenges in structuring the application, including finding a way to reduce the linkage between Tata Motors and Tata Capital, said a senior consultant who did not want to be named. “Tata Capital provides financing services for Tata Motors’ products, which may lead to concerns of ‘concentration risk’ on the balance sheet of Tata Capital.”
The Tatas had been keen on a bank licence ever since then finance minister Pranab Mukherjee announced the plan in his 2009 budget speech. The group appointed retired deputy governor and former CMD of Union Bank of India V Leeladhar as advisor. Subsequently, former CMD of Bank of Baroda MD Mallya was roped in as consultant.
Mahindra & Mahindra Finance had said it would reconsider its position if conditions changed.
“If the guidelines are amended to permit co-existence of NBFC (non-banking finance company) and bank in the same group or if concerns are addressed in some other manner, the company will be applying for the banking licence.”
Sundaram Finance, another keen aspirant, also refrained from applying on the same grounds.

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