Corporate aspirants await clarity

Say draft guidelines are along expected lines; some feel a few clauses may give incumbents undue advantage.

For most corporates, the final draft guidelines for new bank licences have been along expected lines and seem to be a friendly framework, based on experience and feedback in the past. However, the mood has been cautiously optimistic, as they feel the devil may lie in the details.

“We welcome the draft banking guidelines released by the Reserve Bank of India. We look at these guidelines favourably, and believe the Aditya Birla Group will be able to meet the criteria warranted for a strong bank that takes the cause of financial inclusion further,” said Ajay Srinivasan, chief executive (financial services), Aditya Birla Group.

“The draft guidelines are in the right direction. Our group would be keen to explore a banking licence. Our experience of two decades provides us with the necessary understanding and strength in the financial services domain. This, as well as the strong underpinning of ‘inclusion’ in our financial services activities, we believe, eminently qualifies us,” said Uday Phadke, president (finance, legal and financial services sector) and a member of the group executive board, Mahindra & Mahindra Ltd.

“This is still a draft. We shall now apply our minds to go through the fine print before taking a final call. Financial inclusion, too, is high on the agenda. But we have been adapting a business model that addresses the core issue of inclusion. So, I don’t see that as problematic from a viability point of view,” said Hemant Kanoria, chairman & managing director, Srei Infrastructure Finance.

The requirement of minimum paid-up capital of Rs 500 crore, too, is on expected lines. However, some feel some of these clauses may give the incumbents undue advantage. “Overall, it’s on expected lines. Being a draft guideline, there would be room for negotiations and feedback. But we were surprised at the differential capital adequacy ratio of 12 per cent for new banks, compared with the 10 per cent requirement for incumbents and the accelerated timeline of two years for an IPO (initial public offering). Finally, we may need a higher threshold than Rs 500 crore,” said N Sivaraman, president and wholetime director, L&T Finance Holdings.

Most corporates have given their thumbs-up to the draft guidelines. “It will be up to RBI to handle each application on a case-by-case basis,” said a Mumbai-based financial sector analyst from a leading consulting company.

Most banking analysts feel the draft guidelines would increase the burden on non-banking financial companies and would allow them to be converted into banks and be regulated. But what came as a shocker for many was the inclusion of broking companies in the ‘negative’ list. RBI has always been uncomfortable with real estate companies diversifying into banking, but many brokerages like Edelweiss and India Infoline have express their desire to modify themselves into full-service banks. Some, like Edelweiss, had even picked up stakes in smaller banks, a move that many saw as a precursor to a full-fledged entry. However, now, RBI has pointed to a spanner in their plans, citing conflict of interest.

“People with any significant exposure to real estate or broking are out. Other than that, I would say the field is wide open for people to apply. For example, the central bank says if your income from real estate or broking, or both contributes more than 10 per cent, you are not eligible,” said V Vaidyanathan, vice-chairman and managing director, Future Capital.

Overall, most believe the regulator has chosen a middle path. A new bank can only be set up through a wholly-owned non operative holding company (NHOC), which would exclusively be engaged in banking. There is enough safeguard and ring-fencing of corporate operations as well. For instance, the exposure to a single promoter group entity has to be below 10 per cent, while that to all promoter group entities has to be less than 20 per cent. Half the composition of the boards of new banks should have independent directors, and all promoter group exposures would have be vetted by them.

Additional requirements have also been stipulated in cases in which promoter groups have 40 per cent or more assets or income from non-financial businesses. Corporate players said they were still examining the fineprint. “If Bajaj FinServ has to set up a bank, our business at the Bajaj FinServ level would be all financial services. I am not too sure whether RBI would look at the Bajaj FinServ level or the Bajaj Holding level. At the FinServ level, it won’t be an issue. If they look at it at a holding level, we need to understand these additional requirements,” said Sanjiv Bajaj, managing director, Bajaj FinServ.

There is uncertainty over RBI’s interpretation of ownership. It has stated a defined timeline on the shareholding structure of the NHOC: Holding more than 40 per cent has to be brought down in two years, and again, systematically brought down to 15 per cent over a 12-year period. However, RBI has also said promoters and promoter groups with diversified ownership and 10 years of track record would be eligible. The definition of diversified ownership is not clear. Most big Indian corporates do not have varied stakeholders and most business families are classified as single units. But many corporates felt groups with listed entities would not face difficulties, as they had many shareholders.