Last week the Reserve Bank of India (RBI) issued the final guidelines for licensing of new private sector banks wherein entities both from private and public sector shall be eligible to set up a bank through a wholly-owned non-operative financial holding company.
The final licensing norms are largely in-line with draft guidelines, Arun Duggal, chairman of Shriram Group told CNBC-TV18.
"Our preference is to set up a separate bank under Shriram Capital. We want to profitably serve low income families, small businesses, truck drivers, shop keepers etc which are not yet served by the banking system," he added.
In 1993, 10 licenses were granted and in 2001 two licenses were granted. Duggal expects the central bank to grant atleast half a dozen licenses. However, this process should not be a prolonged one.
Below is the edited transcript Arun Duggal’s interview with CNBC-TV18
Q: What have you made of the guidelines and whether they seem more onerous than what the draft recommendations are or whether this actually opens up the field for players?
A: We are still studying the guidelines; they are quite comprehensive and rather detailed. We still are in the process of evaluating the various provisions under the guidelines. However the guidelines are largely in line with what the preliminary guidelines were.
Q: There are just a couple of provisions which pertain to companies like yours. First that the promoter entity is allowed to set up a bank through a non operative financial holding company. All companies do not have this flexibility. Would it be restrictive on the part of Shriram Group to go through this route?
A: It is an important question and I must say that our preference is to go set up a separate bank under Shriram Capital. However let me also say as to what our ultimate desire and aim here is.
We are proceeding on the assumption that the thrust behind the new license will be to improve financial inclusion, to provide banking services to nearly half of our population which is not served at all or served well by the existing banking system.
So that is the assumption based on which we will be proceeding with our application and we would want to create a very different kind of bank, a bank which can serve low income families, small businesses, truck drivers, shop keepers etc which are not yet served by the banking system.
We would want to serve them profitably. To do that we will have to have a very low cost structure completely different way of doing banking and that is what we would like to do, that is what we are planning to work on.
Q: One of the regulation seems to suggest that all Non-Banking Financial Banking Company (NBFC) lending operations within the group need to be merged with the bank. Is this feasible for you?
A: That is not our understanding and that would not make any sense at all from the reading of the regulations.
Q: How difficult would it be for you to meet the Statutory Liquidity Ratio (SLR) and the cash reserve ratio (CRR) recommendations straightaway if you were to set up a bank?
A: That shouldn’t be a problem for us, we have enough financial flexibility and we have planned for it so as far as the capital requirements are concerned it shouldn’t be any problem for us.
Q: There also seems to be the indication that there cannot be any cross lending involved between the bank and any other entities within the group. Does that make sense for an industrial company to not be allowed that to also not have more than 15 percent stake in the bank. How profitable is it to go down the banking route? Aren't you much better off within NBFC that is performing well?
A: We will continue to do NBFC activities in NBFCs and the bank will provide services like transaction, processing, remittance, working capital, deposit products that the NBFCs cannot provide. As far as an industrial house is concerned, it is an important question for them to consider as to what are the benefits of getting into banking. After all in 1993 we had 113 companies applying for banking, 10 were granted. And out of those 10 very few of them were very successful in creating good banks.
Q: Is it your understanding that you will continue to have NBFCs and the bank and the NBFC will continue to operate independently and together?
A: Yes in addition to the bank we will have financing activities in NBFCs as well as our insurance both general and life insurance companies and our financial product distribution business.
Q: On the capital structure how do you crack that problem of the holding company that you alluded to because if that is the clarification then may be Shriram Group does not have the flexibility of operating a holding company through the promoter group.
A: I don’t think so. We have Shriram Capital which is the holding company for our financial services businesses and the financial holding company that is envisaged in the regulation I think we can get there.
Q: What is your sense of how many licenses will actually be up for grabs once the process of putting in applications and the deadline is met?
A: Hard to say. In 1993 10 licenses were granted and in 2001 two licenses were granted. Now we are in 2013 I would expect perhaps half a dozen licenses or so would be granted, but I am hoping that this doesn’t become a 10 year process of granting a few licenses.
There is no harm in granting a few licenses every year that also goes a little soft on the inflation in the employment market in the banking sector if these things are paced out.