Keen on banking licence, but need final guidelines: Shriram

Sundararajan, MD, Shriram City Union Finance and Ashvin Parekh, of E&Y, discuss about the newly passed banking regulation bill.

"The banking amendment is very good at least from the point of view of the RBI. Since the RBI saw many corporate houses interested in getting banking licenses they found it appropriate to get this amendment as a prerequisite for issuing guidelines for new private banks," says Sundarajan.

Also read: All eyes on RBI for final banking guidelines: Aditya Birla

Below is the edited transcript of the interview.

Q: There are news reports doing the rounds about TPG buying stake directly into Shriram City Union Finance. Are those reports accurate?

Sundararajan: Not at all. We are currently dismantling some of our mezzanine investment which we had with TPG in the form of Shriram Retail Holdings. Therefore, they will have listed stock directly with them once they have the court order. It would be around 20 percent. It is similar to what we did in Shriram Transport Finance sometime back.

Q: So there is no fresh infusion of capital by TPG, no change in terms of where things stand with them?

Sundararajan: Yes, no change with them.

Q: What is your view on the Banking Bill which was cleared yesterday and how keen is Shriram City Union Finance in order to go and bid for a banking license when the RBI sets out the guidelines?

Sundararajan: I think this banking amendment is very good at least from the point of view of the RBI. Since, the RBI saw many corporate houses interested in getting banking licenses they found it appropriate to get this amendment as a prerequisite for issuing guidelines for new private banks.

Shriram Group is very keen to get the license because that will be the last feather in our cap in the financial services space. In the earlier draft guidelines, we provided some suggestions. The required modification will help us to execute our keenness. We will take a call once the final guideline is in place.

Q: Do you think your ownership of equity might have any kind of hindrance towards moving towards a banking license, the ownership from the Shriram Group in terms of the promoters?

Sundararajan: No, not really. We are perfectly fine in terms of the ownership. It is quite diversified at the holding company level. The terms of structure will be an issue which the RBI will expect new banks to have in terms of ownership etc.

Q: Some of the draft guidelines had already been set out, anything that you found onerous from Shriram’s point of view?

Sundararajan: Yes, a couple of them. That is the reason why we had suggested to the RBI in our response to the draft guidelines. One definitely is a structure which requires all the businesses of the group to come into the banking undertaking. That is something which can be onerous for a very large group like Shriram which has got Rs 50,000 crore of assets in the transportation business and we also have about Rs 15,000 crore in the City Union Finance Business. So for us that is going to be a bit onerous.

Q: Do you think somebody like Shriram City Union Finance is in pole position for a banking license? What is your assessment?

Parekh: Instead of talking about Shriram City Union specifically, I thought those Non-Banking Financial Companies (NBFCs) who in terms of their size are already large enough to become banks, should be really examined more seriously. The reason is very simple, if we look at the NBFC new reforms particularly after Usha Thorat Committee recommendations then it does become a bit of a challenge for the NBFCs to keep on growing their loan books beyond a certain amount that is one.

Second is cost of funds and the dependence on external funding, public funding also becomes a bit of an issue. So if I go back to the announcement that the finance minister (FM) made, to the then FM made two and half years ago, he specifically talked about NBFCs being given the licenses and I do see some progressive NBFCs getting into that and I see them as very natural candidates to become banks.

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Q: How wide open will they throw this space? In one go do you think it is going to be okay for NBFCs, okay for corporates who choose to apply for a banking licence or so you think there is going to be some kind of gradation where NBFCs get preference and then the next step is to move towards corporates?

Parekh: If we don’t really get into either the categories or the names, what is the underlying reason why this reform is being actually sought? The government is looking at this reform and the regulator is looking at this reform mainly from the capital point of view. In order to fund the economic growth there is a substantial need of capital in the banking sector. We are looking somewhere at around USD 18 to USD 20 billion of capital each year, for the next five to six years to support even a 6 percent or a 5.5 percent gross domestic product (GDP) growth.

If you are looking at a growth like that and a capital size like that, then I suppose it is important to find where the capital is going to come from? We have to accept, that business houses would be in a position to bring in that capital on one side and every large NBFCs who are already in some form or the other para-banks or their balance sheet size maybe larger than many of the smaller banks, then I suppose both become natural candidates.

Therefore, the question is not the numbers; the question is not whether both of them come together. The question is who is going to bring that capital and how much of that capital can be brought and what is the potential they possess to do that?

Q: The market has been quite sanguine about companies like L&T Finance and Shriram City Union Finance getting licenses, but the debate is around entities which are owned by strong promoter groups which have a lot of industrial interest like M&M Finance, Aditya Birla Group, the Reliance ADAG Group. Do you think those will find it difficult to get a banking license?

Parekh: The answer lies in the approach the regulator will take and the kind of guidelines that he will work out. We have to admit that if business houses are admitted into the banking sectors, then we have to accept the fact that the regulator will have to first do a substantial amount of qualitative filtering. Filtering to make sure that some of the very fundamental issues with which the nationalization of banking sector had to be carried out in the past, do not once again come back and show their face to us.

So, whether it is governance, whether it is management, whether it is the independence that the banking companies will really enjoy. All that can be done if the regulator were to come out with very clear guidelines right in the beginning, if he accepts that the banking houses have to be admitted.

So some of the names that you mentioned who are associated with large business houses; from the reputation point of view, from their presence in this market for such a long period point of view, they are eligible candidates. What is important is not just their eligibility but the framework within which they have to function and that is where I suppose everybody is now eagerly waiting for the guidelines.

Q: How aggressive do you think mergers and acquisitions (M&A) activity will be because there is a lot of focus on the old smaller banks and how they make be prime candidates once the guidelines are set out?

Parekh: There are two-three observations that I am making. One is if some of those old private sector banking companies were waiting to change hands on account of good valuations, if they were waiting for good valuations to happen, then this would be a good time. Because with new guys who get their licences, it would be a very normal thing for them to approach this particular aspect more seriously. They would be prepared perhaps to pay a price for the network, in addition to the portfolio that these old private sector guys maybe having.

I would say it is a very good trigger at this point in time. It will drive valuations on one side and drive very good reasons for some of the old private sector guys to consider either the selling off or the merger more seriously.

Q: Would that be an option at all for an NBFC like yours to actually look at a potential M&A candidate where there is a banking license available, there is a wide enough network to act upon and you can automatically diversify?

Sundararajan: Not definitely for the group because Shriram always has believed in organic group. Today we are looking at a license and with the kind of network and customer base we have in the underserved segments, we are essentially already poised to actually grow if we get a banking license as per the kind of requirements we have. So we are really not looking at a merger with any smaller bank at this point in time.