All eyes on RBI for final banking guidelines: Aditya Birla

Sachindra Nath, Religare Enterprises and Ajay Srinivasan, CEO, Financial Services, Aditya Birla Group discuss about the newly-passed banking amendment bill.

Also read: See fisc cliff deal soon; positive on India: Aberdeen Asset

Below is the edited transcript of his interview to CNBC-TV18.

Q: What is your view on the banking amendment bill?

Srinivasan: This bill paves way for final banking guideline. One should expect final guidelines to come once the bill passes through Rajya Sabha. And thereafter things will be clear how the process will work. We are interested in this space and we will closely monitor the situation.

Q: What would be the best way for an NBFC to start a bank at this point in time? Would it be via starting operations separately, hence merging the NBFC operations or keeping it separately or via M&A route. What could be the most logical way to start with regards to even focusing on financial inclusion as well?

Srinivasan: It will vary from player to player but broadly there will be two types of models. In the first option, NBFC would convert itself in to a bank; this route was also open in the earlier guidelines as well. Second, just apply for bank and continue to keep an NBFC. I think both options remains open in the last set of guidelines that we saw.

Q: What about M&A?

Srinivasan: It may not be an entry step but a subsequent step that players could look at.

Q: Many small banks like Dhanalakshmi Bank, Lakshmi Vilas and Karur Vysya Bank have been running up and has been of course, potential candidates who are likely to get licences but will that be culturally and practically a hostile takeover, an open offer will that become common?

Srinivasan: It may be a possibility. People will have to weigh the opportunity of getting a ready network against setting up anything purely Greenfield. Again it varies from face to face.

Q: In the current business scenario is it so lucrative to get a banking licence?

Srinivasan: Like any other sector of the economy, there will be some advantages and challenges for a new player. In case for bigger numbers, there is still a reasonable opportunity for growth. Compared to the size of the economy banking is still reasonably under bank, and we are relatively quite small to any of the other parts of the world. Overall, there is continuous scope to banking to grow.  

In today's business concept going forward the margin will be low compared to what they were earlier. But one look at the financial services sector, 70 percent of the profits, revenues are still in banking. Probably, some of the strongest customer’s franchises are banking today.

Q: Who do you think would be the possible or likely candidate to get a banking license? In your opinion what would be the most likely thing the RBI would be looking at with regards to diversified ownership?

Srinivasan: The RBI has talked about diversified ownership. I think listing often provides one with diversified ownership so I don't know whether the will provide further clarity or it will then be up to the RBI to make a judgment as to what will qualify diversified ownership. I think that is really the guiding principle behind their thinking.

Q: What do you think the markets can do in the next quarter or two quarters? Do you think there is substantial positive policy vibes and other vibes to take it past 6,000 mark, another 10 percent gains is there to be had in the next 6 months?

Srinivasan: Once we pass the fiscal cliff, there will be more certainty from an international perspective. Domestically, inflation is looking to come under control and there are expectations of easing interest rate from early next calendar year. I think we should see good momentum in the market.

Q: According to draft guidelines the Reserve Bank has expressed its wariness. The statement reads "There are certain activities such as real estate and capital market activities in particular broking activities which are apart from being inheritantly being riskier represent the business model and business culture which are quite misaligned with the banking model." "Entities, groups that have a 10 percent or more income or assets, from such activities including real estate, construction and broking taken together in the last three years shall not be permitted to promote banks". So, do you qualify?

Nath: I think we qualify because they talk the broking revenue at the group level. In the intent, the RBI is more concerned about people who are involve in proprietary trading as it create some type of balance sheet risk. At a group level, our broking revenue is less than 10 percent, we are not engaged in any form of proprietary trading and neither have we had any real estate business within the group. I think we qualify on this account.

Q: This mean 90 percent of your income comes from NBFC and 10 percent from broking?

Nath: No. According to the guidelines, RBI is giving license to a business group and they are not concerned at a financial services entity level. After consolidating revenue from healthcare and financial services, revenue from broking contributes to less than 10 percent. Religare Enterprises and Religare Securities which is our subsidiary they do not contribute more than 15-16 percent. The contribution is lowering because our NBFC and other businesses are growing and revenues are growing very fast.

Q: What would you think is the most prudent or the logical way that we will see once the licences do come through of companies starting banking operations? What is the most logical way with regards to financial inclusion? Many analysts mentioned that M&A would be the most logical method to start because then there wouldn’t have that problem with regards to the un-branched clause which comes in?

Nath: I think one should adopt financial inclusion. It is a best way for any large non banking finance business to covert non-banking financial business into the banking business and uses the advantage of the existing infrastructure, existing capital, and existing branch network and then grow on that platform. Our NBFC business is aligned and we already service more than 20,000 SMEs in the country.

Recently, IFCI invested in Religare Enterprise and chose us as a partner for development. In the next 3-5 months, we will learns from them about different markets, how to be financial inclusive, sustainable and profitable in the long run.  

Q: You saw RBI's previous two cycles of licence issuances in 1994 and 2002. How many do you think they will issue at all this time around?

Srinivasan: I think the guidelines will make it clear as to who qualifies in the second category. 

Q: Do you think take over of small banks would occur to everybody who gets a licence. Will that be the fastest way?

Nath: It is a good thing to happen from market and regulator prospective but there are many challenges in consolidating those businesses. Given the constraints of banks, their shareholding, the people who are interested in running those businesses,  it would be difficult to know how prudent and practical it would be to merge those businesses into new banking license. 

Q: Do you mean that there would be culture issues?

Nath: There will be multiple challenges like management challenges, culture challenges and geographical challenges. We have not seen natural consolidation in banking but we have only seen compulsive consolidation in banking in India.  

Q: What is your view with regards to the entire banking amendment bill which was passed and the other controversy like the voting rights, regulatory power by the RBI going forward besides the fact that this paves the way with regards to banking licences?

Nath: I think so. Many people are linking this power which has been granted to the new banking licence. The Reserve Bank needs this power in any case whether it is new bank or old bank. In the past also, power to take control of the banks and securing deposits of the holders were required by the RBI irrespective of the new banking license or not. I think these changes are phenomenal and good.

From a regulative perspective, now they have substantial power to make sure that the overall financial eco-system does not come under stress as they would have power to control and make changes very quickly.

People who plan to float new banks and have economic interest in putting substantial capital, increasing voting right goes very well because one will be able to drive and create value from these new businesses.