 "Big firms left out of on-tap bank licence")
The Reserve Bank of India (RBI) on Thursday proposed granting on-tap universal banking licences to individuals, groups or entities and companies.
However, the criterion for corporates will effectively rule out entry for business houses like Reliance, Tata and Birla, which had ambitions of floating universal banks.
According to the draft guidelines, at least 60 per cent of a group's income should come from financial services, as a result of which many large industrial houses are automatically excluded.
Apart from this, RBI said, to be eligible to apply, the corporate entity should have a minimum asset size of Rs 5,000 crore and a successful track record of 10 years. The corporate group has to float the bank through a non-operative financial holding company (NOFHC). Corporate houses or their promoters can hold up to 10 per cent stake in these new banks but are barred from having any controlling interest in the bank.
"We have to read between the lines. On the one hand, no corporate house or its promoter can hold more than 10 per cent in the new bank, and at the same time, 40 per cent of the paid-up capital has to be held by the promoter in the bank. Both together are not technically possible. Therefore, corporates have been excluded," said Ashvin Parekh Advisory Services LLP.
Non-banking financial companies (NBFCs) having a track record of at least 10 years can either convert themselves into a bank or promote a new bank. Individuals seeking to float a bank, either singly or jointly, should have banking or financial services experience of at least 10 years. In the case of individuals, they have to set up a NOFHC that will then be registered with RBI as an NBFC. All these NOFHCs will not be allowed to open any new financial services entity for at least three years, but are allowed to have a subsidiary or a joint venture in mutual fund, insurance, stock broking etc.
Banking experts say the draft guidelines indicate NBFCs will have the biggest chance to float banks. "It is unlikely that any large industrial business house will be able to qualify under these set of rules," said a senior consultant who has advised corporate houses on banking licence applications earlier. However, the regulation states that preference will be given to those NBFCs that have diversified promoter shareholding.
Two NBFCs that had earlier applied for licences, UAE Exchange and IIFL Holdings, have expressed interest in applying for on-tap universal banking licence.
A senior official at UAE Exchange said prima facie the NBFC meets all the criteria and is looking at applying for a licence once the final guidelines are out.
"Now that bank licences are on-tap, there won't be any rush. We will evaluate and decide if we want to apply for a universal banking licence. We are a large diversified group engaged in lending activities pretty similar to banks. So it makes sense for us to become a bank. We do have a 10-year track record and our loan AUM is about Rs 20,000 crore," said Nirmal Jain, chairman and founder, IIFL Group.
If found fit and proper for the licence, the minimum capital required to float a bank is Rs 500 crore and the lender needs to maintain a minimum net worth of the same amount at all times. The new lenders will also have to open at least 25 per cent of the branches in un-banked areas, keeping in mind RBI's financial inclusion agenda.
The shareholding pattern will be similar to the one for existing private sector banks, where an individual or a company needs to have less than 10 per cent stake and ensure they do not have a controlling stake.
It also states that the promoters need to hold a minimum of 40 per cent of the paid-up voting equity capital of the bank, which will be locked in for five years. If the promoter holds more than 40 per cent of the paid-up voting equity capital, the stake has to be trimmed to 40 per cent within five years. This shareholding has to be further cut to 30 per cent within 10 years and 15 per cent within 12 years.
As far as the shareholding of the NOFHC goes, the promoter group should hold at least 51 per cent of the total voting equity shares.
In all cases, the applications will be screened by the RBI in the first stage and thereafter by a standing external advisory committee, which will be set up by the regulator.
At present RBI provides window only periodically, but rarely, for universal bank licence. Going forward, it intends to keep the window always open for banking aspirants to apply.
Head of a financial advisory business at a large professional services firm said this transition reflects RBI's maturity to have in place processes and systems to consider applications on a continuous basis.
The new lender will have to maintain a capital adequacy ratio of 13 per cent for three years after it starts its business. And the new bank will have to be listed on stock exchanges within six years of the commencing business.
However, the criterion for corporates will effectively rule out entry for business houses like Reliance, Tata and Birla, which had ambitions of floating universal banks.
According to the draft guidelines, at least 60 per cent of a group's income should come from financial services, as a result of which many large industrial houses are automatically excluded.
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"Corporate-promoted non-banking financial companies (NBFCs) won't be allowed to apply for the banking licence," said Abizer Diwanji, head of financial services at EY.
Apart from this, RBI said, to be eligible to apply, the corporate entity should have a minimum asset size of Rs 5,000 crore and a successful track record of 10 years. The corporate group has to float the bank through a non-operative financial holding company (NOFHC). Corporate houses or their promoters can hold up to 10 per cent stake in these new banks but are barred from having any controlling interest in the bank.
"We have to read between the lines. On the one hand, no corporate house or its promoter can hold more than 10 per cent in the new bank, and at the same time, 40 per cent of the paid-up capital has to be held by the promoter in the bank. Both together are not technically possible. Therefore, corporates have been excluded," said Ashvin Parekh Advisory Services LLP.
Non-banking financial companies (NBFCs) having a track record of at least 10 years can either convert themselves into a bank or promote a new bank. Individuals seeking to float a bank, either singly or jointly, should have banking or financial services experience of at least 10 years. In the case of individuals, they have to set up a NOFHC that will then be registered with RBI as an NBFC. All these NOFHCs will not be allowed to open any new financial services entity for at least three years, but are allowed to have a subsidiary or a joint venture in mutual fund, insurance, stock broking etc.
| PROMOTING PRIVATE BANKS BUT CAUTIOUSLY |
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Banking experts say the draft guidelines indicate NBFCs will have the biggest chance to float banks. "It is unlikely that any large industrial business house will be able to qualify under these set of rules," said a senior consultant who has advised corporate houses on banking licence applications earlier. However, the regulation states that preference will be given to those NBFCs that have diversified promoter shareholding.
Two NBFCs that had earlier applied for licences, UAE Exchange and IIFL Holdings, have expressed interest in applying for on-tap universal banking licence.
A senior official at UAE Exchange said prima facie the NBFC meets all the criteria and is looking at applying for a licence once the final guidelines are out.
"Now that bank licences are on-tap, there won't be any rush. We will evaluate and decide if we want to apply for a universal banking licence. We are a large diversified group engaged in lending activities pretty similar to banks. So it makes sense for us to become a bank. We do have a 10-year track record and our loan AUM is about Rs 20,000 crore," said Nirmal Jain, chairman and founder, IIFL Group.
If found fit and proper for the licence, the minimum capital required to float a bank is Rs 500 crore and the lender needs to maintain a minimum net worth of the same amount at all times. The new lenders will also have to open at least 25 per cent of the branches in un-banked areas, keeping in mind RBI's financial inclusion agenda.
The shareholding pattern will be similar to the one for existing private sector banks, where an individual or a company needs to have less than 10 per cent stake and ensure they do not have a controlling stake.
It also states that the promoters need to hold a minimum of 40 per cent of the paid-up voting equity capital of the bank, which will be locked in for five years. If the promoter holds more than 40 per cent of the paid-up voting equity capital, the stake has to be trimmed to 40 per cent within five years. This shareholding has to be further cut to 30 per cent within 10 years and 15 per cent within 12 years.
As far as the shareholding of the NOFHC goes, the promoter group should hold at least 51 per cent of the total voting equity shares.
In all cases, the applications will be screened by the RBI in the first stage and thereafter by a standing external advisory committee, which will be set up by the regulator.
At present RBI provides window only periodically, but rarely, for universal bank licence. Going forward, it intends to keep the window always open for banking aspirants to apply.
Head of a financial advisory business at a large professional services firm said this transition reflects RBI's maturity to have in place processes and systems to consider applications on a continuous basis.
The new lender will have to maintain a capital adequacy ratio of 13 per cent for three years after it starts its business. And the new bank will have to be listed on stock exchanges within six years of the commencing business.