RBI finally shuts the doors on corporate houses' bank licence hopes

The central bank's final guidelines for on-tap licences has upset the plans of many a big name that had drawn up elaborate plans for a bank

The Reserve Bank of India (RBI) has now made it clear that large industrial houses will not get a chance to launch commercial banks, upsetting the plans of many a big name that had drawn up elaborate plans to have a bank under their umbrella. 

The issue of whether to grant big corporates a banking licence is as old as the exercise of granting licence itself. Back in 1990s, when the RBI doled out its first set of licenses, it left out industrial houses.  

Again in early 2000s it did not award licences to the big names. However, when the time of the next generation of banking licences came a decade later, RBI dilly-dallied. It brought out a discussion paper on August 11, 2010, outlining the pros and cons of offering licences to industrial houses. 

 

Corporate India was aflutter with excitement and soon a number of large corporate groups started hiring experts and former bankers to guide them on the route to getting a licence. RBI officials, meanwhile, went public stating they didn’t particularly fancy corporate houses floating banks. 

The Reserve Bank was “painfully aware of the pitfalls” in allowing industrial houses to float banks, then deputy governor Anand Sinha said in October 2012. 

Nevertheless, when RBI asked for the applications, a number of big names lined up to submit their candidature. Some even went ahead and changed their corporate structure to reflect a holding company model that would house all the financial businesses under it, including banks. The reason for this was RBI’s insistence that it would prefer giving licence to companies with a holding company structure. 

But the excitement did not last long. After applying for the licences, one after another started withdrawing as it became apparent that by pursuing the banking licence, the core business of the company could weaken. Besides, the promoters wouldn’t be able to hold much equity in the bank. And then there was the iron-clad rule that the bank could not lend to its group companies or the family of the promoters. 

In short, having a bank under its umbrella would at best be a trophy for the corporate group and not necessarily a business case. 

Still, there were some who might have taken the plunge. 

That is now impossible after the final guidelines on on-tap universal banking licence were released on Monday. The best case for any corporate is to hold 10% in a bank, at best. Ownership, for now, remains a mirage. 

The new licencing regime is heavily tilted towards non-banking finance companies not owned by large companies. IIFL Ltd, UAE Exchange and Muthoot Finance have told Business Standard that they would be interested. More names will surely surface, but it will be a while before the country sees its next set of universal banks.