Tata Group withdraws application for banking license

Tata Sons has withdrawn its application for a banking license, the Reserve Bank of India said in a release Wednesday.

“The company has indicated that its current financial services operating model best supports the 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,” the RBI release said, adding that the application had been accepted.

Twenty six entities had applied for the banking licenses on offer. Of the remaining 25 applicants still in the fray, big names include, 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.

Likely reasons for the withdrawal:

1. There could be some resistance in the regulatory oversight that the Reserve Bank of India (RBI) gets or is demanding once a banking licence is given. It has asked and has got supervisory powers over all companies in the group and their vendors and associate companies.

The fear being that if there is a Tata Bank, then it could give subsidised loans to a vendor, a supplier to a Tata Motors or buyer of Tata car.

If one wants to ring fence the bank, which is of public utility from the demands and maybe the pressures of the group companies, a great deal of supervision will be done by the RBI was always a deterrent for some groups. That could be one reason.

2. The other big reason could be that the sheer attraction is kind of not very high given the rules put in by the Reserve Bank. In the first two or three years, the bank will have to meet cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements. Then there will be pressure on the margins, the return on equity (ROE) will be very unattractive.

Then there are also the priority sector obligations whereby 25 percent of the new branches will have to be opened in unbanked areas or in tier III, tier IV, tier V or tier VI areas.

All this makes it very difficult for the new entrant, especially when there is competition from people who are established in the field and who will be able to give money at lower rates.

3. The other disadvantage for a big group like Tata’s and that would have been for Mahindra’s if they had applied, would be that by the time the company would start making money, it is time for the promoter to start reducing their stake because from the fifth through the 10th year, the RBI actually wants the promoters to start reducing their stake. It wants the stake to be reduced from 40 percent to 25 percent and 20 percent. So, as it becomes attractive the company would not be able to milk it to its advantage. Hence, there was always a feeling that big groups might move out and here is the first example.