New banking norms invite large number of players: Experts

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The Reserve Bank of India released on its website today the Draft Guidelines for licensing of new banks in the private sector. CNBC-TV18's Latha Venkatesh talks to V Vaidyanathan, vice chairman and managing director of Future Capital and AK Purwar, industry expert to get their reaction and talk about the effect of the same on companies.

Q: What have you made of the rules? Would it not mean that companies like yours also will not be eligible?

Vaidyanathan: My instinct or read of this is that they have a no go list, in the sense that people who have 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, they say that if you have income greater than 10% in either real estate or broking or combined put together you are not eligible.

Q: So you don't have a problem with this? Would they, by any chance, interpret the lending you do to real estate related activities as an issue and would that be 10% of your income?

Vaidyanathan: Not at all actually, it's the other way round. There are companies and there are groups where a substantial portion of the income is through real estate. For example, real estate construction or broking being the primary business. So that, in my read of the situation, is out. But if you are actually in the lending business of either real estate or property loans or SME loans, which happen to be collateral as property, I don't think it's got anything to do with lending, it's got to do with ownership.

Q: Promoters and promoter groups with diversified ownership and 10 years of record etc shall be eligible. What does it mean by promoter groups with diversified ownership? L&T and ITC to the best of my knowledge have diversified ownerships. But most of the big business groups don't have diversified ownerships; we identify them with one family. So all those cannot apply?

Vaidyanathan: My read is again that it's not necessarily diversified, but I would read this more in terms of exclusion like I described before. But at the same time, businesses which have a 10 year or more track record with a good level of integrity as publicly known would be eligible. I would imagine that at the next stage, they would probably even look for companies which have a stable source of income and stability of track record of earnings and financial strength.

Q: I am seeking clarity as to who is going to be eligible. What do you make of this sentence; promoter and promoter groups with diversified ownership shall be eligible to promote banks. How would you understand diversified ownership?

Purwar: There can we two ways at looking it. One that promoter group where the promoter company committee has been promoted by - there is one promoter group and company has other important significant shareholders like L&T, which is a highly diversified ownership company. The other meaning could be that company which owns diversified kinds of businesses; it has presence in cement, steel, etc.

Q: They don't seem to say that; they say promoter groups with diversified ownership. The market wants to know if Tata Capital and Aditya Birla Money will be allowed?

Purwar: I think that if you take that meaning then of course many of these industry houses may not become eligible. But a company like L&T would definitely become eligible.

Q: They say that people getting 10% of their income from real estate and capital market activities either singly or together will not be allowed. If read strictly, doesn't this mean that the big corporate houses and the entire broking industry has been kept out, making the number of eligible people smaller?

Purwar: Even the real estate industry. All the three are necessarily not eligible.

Q: In that case how many people throw their hat in the ring?

Vaidyanthan: I would say that the interest in this sector is very high. I read this statement only in terms of exclusion and I don't read too much into this diversified ownership thing. So the moment you exclude real estate and broking, then the market has number of players.

Q: Would it be that the RBI requires Aditya Birla Money or Future Capital or a Piramal Group to bring in only a certain percentage or would own only a certain percentage of the holding company and they would want the holding company to be held by others, maybe other pools of private equity?

Vaidyanathan: Excluding the 40%, they have been silent about who else could be holding the balance 60%. Whilst private equity is just one the options, it could very well be real estate or a set of strategic investors and so on. What is important to read here is the 40% and the fact that it will stay locked for five years. I would imagine the main reason of having this 40% and locking it for five years is to make sure that the license doesn't get traded, like what happened in the telecom sector for example.

Q: What are your comments on this, more importantly that foreign shareholding shall not exceed 49%?

Purwar: What they have clearly defined are the boundaries. We know the domestic and foreign ownership of the private sector banks. These guidelines definitely indicate that for a certain time, they are not allowing foreign ownership to go beyond 49%, and they are very specific about it and I think that's how it should be read there.

Q: Do you think that these are sensible rules that have come in? Do you think that there will be adequate partnership; will we see a larger number of banking participants?

Purwar: I personally believe that these are very good set of guidelines. They allow huge amount of scope for various players to come in, throw their hands in the ring, try for a license and get a license if considered suitable. It will give an opportunity to some of the professionals to come in and try to set up some kind of a bank with the help of different industry professionals.

Q: Will one of that professional be AK Purwar?

Purwar: I don't know. I would love to.

Q: Do you expect a lot of people to come in and therefore give the banking industry a sizeable amount of new competitors because of these rules?

Vaidyanathan: First of all, we all know very well that India can do with more number of banks. The most important thing was that to make sure there is systemic stability and the banks which come in have ownership and a long term commitment to this business. As far as I read it, these norms are excellent because it opens the field and I think a large number of players can be expected to apply as far as these guidelines are concerned.

If anything, I would say that the minimum capital requirement of Rs 500 crore is a bit on the lower side. Beyond that, I would say that all the other comments are really good norms.