TATA SONS BAILS OUT - DOES RBI NEED TO RETHINK ITS RULES?
By Ruma Dubey
There were 26 companies which had applied for the banking license – Tata Sons, Aditya Birla Nuvo Bajaj Finserv , Department of Posts, Edelweiss Financial Services , IDFC , IFCI , Indiabulls Housing Finance , India Infoline , J M Financial , LIC Housing Finance , L & T Finance , Reliance Capital , Religare Enterprises , Shriram Capital and SREI Infrastructure Finance, INMACS Management Services, Janalakshmi Financial Services, Magma Fincorp, Muthoot Finance, Smart Global Ventures, Suryamani Financing Co, KC Land and Finance, Tourism Finance Corp of India, UAE Exchange of India, Value Industries which was part of Videocon Industries. Mahindra & Mahindra, which was touted to be a popular contender, decided to opt out.
Amongst all these names, which is the name that you would trust your money with? First on the list would most obviously have been Tata Sons, L&T coming in close behind and then maybe IDFC or Bajaj or Aditya Birla. But to now know that the most preferred – Tata Sons has decided to withdraw its license comes as a shock, a major disappointment.
The Tata group is the largest and most trusted conglomerate we have. In this era of dwindling corporate governance, Tata’s are considered to be right there at the top and it was the most natural thing for it to do – set up a bank. But it opting out does point out to some glaring deficiencies in this entire process. M&M opted out and so did Videocon Industries. Shriram Capital is also said to have withdrawn but there is no official confirmation on the same. So why is it that big names are opting out?
Tata Sons, in its statement to RBI stated that its current financial services operating model best supports the current needs of the Tata group’s domestic and overseas strategy, and provides adequate operating flexibility to its companies, while securing the interests of the group’s diverse stakeholder base. RBI has accepted its withdrawal.
M&M, which through M&M Financial Services was earlier getting all ready to apply for a banking license, decided to opt out even before applying. It had then stated the reason - RBI’s norms were not conducive for large and successful non-banking financial companies (NBFCs) to turn into banks.
Tata Sons has put out a very ‘politically correct’ statement, giving its reason for opting out of the banking license. But no one is really buying this reason. The real reason is indeed the norms, which are not conducive for big corporate to operate as a bank.
1: For NBFCs, the requirement of higher capital in the form of statutory liquidity ratio (SLR) and cash reserve ratio (CRR), that too in the first 2-3 years of inception is itself too high, leaving little room for good or even reasonable margins and return on equity. To get to a course where the banks will be able to mobilize loans at cheap rates could take years.
2: The issue of priority sector lending, wherein 40% of money loaned by banks has to go to agriculture, mall businesses, retail traders, self-employed individuals and professionals is a bone of contention. Many of these big companies or NBFCs have complained that such lending will render them with a poor balance sheet.
3: Another bog thorn is the norm which stipulates that promoters need to bring down their stakes. With the first three tears, the new bank will have to get listed and promoters stake much come down to 40% and over the next 10 years, the stake has to come down to 20% and in 15 years, promoters much hold only 15%. This in fact has kept away many as this means that when the bank actually starts earning money, promoters will have to start reducing their stake and get little benefit for the value they have helped create.
4: Also, the norm of 25% new branches to come up in unbanked or Tier III, IV, V or VI areas is not seen by many as lucrative. For new entrants, this would once again a loss as they will first have to contend with more spend on marketing to establish its name and then will have to deal with competition from existing banks, who would have been there around for years and would be able lend at lower rates.
5: What is also not acceptable to many is that that the bank, from the day that it gets the banking license will be subject to targets on lending to priority sector. This kind of scrutiny would be unwelcome for most.
These were issues which many companies have asked RBI to have a relook but RBI decided to stick to its rules. From the point of view of the companies, these norms might sound intrusive and uneconomical but from what RBI is trying to do, protecting the right of the people first, these rules make perfect sense, hinging even on being idealistic.
The fact that RBI knew of these ‘irking’ issues for companies and decided to stick on means that it clearly believes these rules are required. And those who are interested, despite these rules, will stick on.
Yes, the ace banking license aspirant is gone but let’s now see how RBI moves ahead and more importantly – who all get awarded with the banking license.