Banks oppose granting new licences to business houses

Banks have opposed corporate houses being given banking licences due to “unsatisfactory past experiences”.

In their feedback to the Reserve Bank of India’s (RBI’s) discussion paper on new licences in August, banks said it would also create an uneven playing field due to the large capital buffer that would be available to banks sponsored by industrial or business houses.

Banks do not in favour non-banking finance companies promoted by industrial houses entering the banking sector, either. “Banks were in favour of allowing only standalone NBFCs to promote banks and, at the same time, barring NBFCs sponsored by industrial/business houses,” RBI stated in the summary of comments it has received, released on Thursday.

Expectedly, the comments were diverse and there was no consensus on any of the issues, RBI said. For example, the industry bodies and the NBFC-microfinance sector favour permitting industrial and business houses to promote new banks.

It was also suggested that real estate companies should not be barred from entering the banking sector. This is because businesses such as steel, textiles, petrochemicals and oil & gas are far more vulnerable to deep and prolonged cyclical downturns than real estate.

Those opposed to such a move said though the experience of other countries shows combining banking and commerce implies connected lending, India does not have enough experience in supervising banks owned by diversified corporates. Allowing such ownership could have serious potential disasters.

On the issue of minimum capital requirements for new banks, industry associations and banks favoured a high start-up capital of Rs 1,000 crore, which could be raised to 2,000 crore over time. NBFCs and MFIs preferred a lower capital requirement of Rs 300-500 crore.

NBFCs and MFIs made a case for 30- 40 new bank licences within 10 years, with a dedicated focus on financial inclusion. They also argued that large banks with a capital of Rs 1,000 crore were unlikely to be effective at local lending or at financial inclusion.

Therefore, RBI may also consider restricted (traditional) banking licences for about 20 new banks with a minimum capital of Rs 50 crore and a capital-to-asset ratio of not less than 15 per cent.

The suggestions on initial promoters’ contribution ranged from 30 per cent to 100 per cent. While industry bodies suggested a range of 40-51 per cent, the NBFC & MFI sector suggested a lower range of 30-40 per cent.

“There was a suggestion that on the lines of the Canadian model, depending upon the size of the bank, promoters should be permitted to hold to the extent of 40 per cent in case of banks with Rs 1,000 crore initial capital, 30 per cent in case of banks with Rs 1,000-2,000 crore capital and 10-20 per cent in case of banks with capital of more than Rs 2,000 crore,” RBI stated.

Regarding foreign shareholding in new banks, suggestions ranged from capping this at 50 per cent to no restrictions at all. Even among the industry associations and banks, while some advocated a 50 per cent cap, others suggested continuing with the existing norm of 74 per cent or not having any restriction for the initial 10 years.

The NBFC & MFI sector was of the view that prescribing a cap of 50 per cent would be contradictory, since foreign investments in the NBFC sector is permitted up to 100 per cent. They were in favour of retaining the existing norm of 74 per cent or no restrictions at all.

Another suggestion received from public was to put restriction on the voting rights, which should not exceed 5 per cent individually and 26 per cent in aggregate or such other limits.