NEW BANKING LICENCES - WILL RBI ACT AS THE FM URGES TO SPEED UP?

By Ruma Dubey

The buzz around the new banking licenses has once again caught the wind. The Finance Minister,  who is as such miffed that the RBI Governor did not reduce rates, is now trying to push RBI into speeding up with its work on issuance of new banking licenses.

The FM has urged RBI to finalise guidelines for new banking licences and start accepting applications for the same. His logic is that the Banking Amendment Act will get passed in the Parliament, probably during the Budget session and felt, it would be silly if RBI started acting after the Act is passed. He wants RBI to finish its part of the work so that the moment the Parliament clears it, the ball could be set rolling.

FM has said that even if the RBI proceeded to receive applications and process them now, the first banking licence was not likely to be issued in the next 6-8 months. He stated that by the time the licence is issued and the banks come to existence and begin to function, the Act would have been amended.

So what is the amendment which RBI needs? These amendments are with regards to RBI getting more power or authority when it has to deal with the corporate sector entering the banking sector. RBI wants powers for dissolution of a bank’s board and the power to inspect associates.

And the new guidelines? As per the guidelines issued in August 2011, RBI had stated that promoters/promoter groups with diversified ownership, sound credentials and integrity that have a successful track record for at least 10 years in running their businesses shall be eligible to promote bank entity. It had stated that a group undertaking real estate or capital market activities, mainly broking, on a significant scale should not be considered for a bank licence. Minimum capital requirement was stipulated at Rs.500 crore. The bank can be set up only through a wholly owned Non-Operative Holding Company (NOHC) which will hold minimum 40% of the paid-up capital of the bank with a lock in of 5 years. And when the shareholding in NOHC exceeds 40%, it has to be brought down to 20% within 10 years and to 15% within 12 years. FDI cannot exceed 49% for the first 5 years. And it states that existing NBFCs will be permitted to either promote a new bank or convert themselves into banks.

These norms make it clear that corporate houses cannot really set up a bank and the FM is keen that they be allowed. But for now, he has asked RBI to at least start accepting applications from NBFCs and later the corporate house clause could be added. The industry wants FDI at 74%, relaxation in NOHC shareholding. The FM himself has stated that instead of a ballpark Rs.500 crore capital requirement, the capital should be based on the size of the bank - local, regional and national banks. So based on the guidelines which RBI had released, many suggestions have come forth and the FM has urged that RBI move fast and release a new guideline, incorporating the various suggestions where it seems right.

The buzz is that with the FM now pushing this, RBI could be forced to act and we might soon see the new guidelines and there is an outside chance that applications might be invited. And who could be in the race?  First and right ahead is L&T Finance, followed by Bajaj Finserv, Mahindra and Mahindra Finance, IFCI, Shriram Capital, Reliance Capital, are the immediate big names which could get invited.

Let us see what happens on this sector in the coming few days; it would be interesting to see if this time around, RBI ‘listens’ to the FM and toes the line. On the interest rates front, RBI was right in sticking to its guns but this time around, the FM makes more sense and RBI should move.