The unchanged CRR, SLR norms, which are stringently set by RBI, will weed out non-serious players in the race to get new bank licence.
A day after the RBI gave its clarification on the new banking licences, AK Purwar, banking experts and former chairman of State Bank of India, says the clarifications will help ruling out non-serious players.
With RBI's compliance norms for cash reserve ratio (CRR) and statutory liquidity ratio (SLR) remaining unchanged, the long list of applicants is expected to shrink, says Purwar.
"What will happen is that now only very serious aspirants who want to be a player in the long-term, who will have to put risk in the game and who will have to really make huge capital provisions would be allowed to come in. The rest are ruled out," says Purwar.
CRR is the deposit that banks have to mandatorily keep with the RBI at zero percent interest. Currently, CRR is 4 percent of a bank’s deposits and SLR, that is the percentage that a bank has to compulsorily invest into Government securities is about 23 percent of the bank’s deposits.
Purwar also adds that the clarifications clearly indicate the central bank’s inclination to financial inclusion. This, according to Purwar is evident from the RBI’s norm that for a company to get a licence, it should have atleast 25 percent of its branches in unbanked rural centres ( having a population upto 9,999 as per the latest census).
Below is the edited transcript of Purwar’s interview to CNBC-TV18.
Q: How have you read the clarifications and what’s your expectation based on that?
A: RBI has made very clear clarifications that they are not going to give any relaxation at all as far as CRR and SLR requirements are concerned. What will happen is that now only very serious players who want to be a player in the long-term, who have to put risk in the game and who have to really make huge capital provisions, only those players would be allowed to come in. The rest are ruled out.
Secondly, the financial inclusion seems to be the main objective of this time’s licencing. That being so, the RBI’s purpose is becoming clearer now. They want to open branches in un-banked areas and that has its own cost inflation implications. So, the players who will apply will now have to look at both these aspects very closely.
Q: So your sense is guys with deep pockets rather than the myriad Non-bank financial companies (NBFC) would be preferred or will put their hat in the way.
A: Both have their advantages. Some of the NBFCs have prepared themselves very well for the banking business. Some of them have about 2,000 branches. They have created branch network which is very expensive in today’s time. They are doing everything possible, all kinds of products distribution, all sorts of loans and so on. So, they have their advantages.
However, if the rules for SLR and CRR remain unchanged, then there will very limited players who have credibility to raise funds and put capital in the business. So selectively, a lot of players will automatically get out of the race. That is one bit of it, but the other side is that people with deep pockets, serious commitments, long terms vision, long-term play only will be now be interested in this business.
Q: One of the big cribs for the NBFCs is that all the NBFC businesses which a bank can do has to be done only by the entity which is selected as the bank. Won't there be a problem of the shareholders of the de-merging company throwing a fit. It is fine for the company which owns the license itself because there the valuations are rich or atleast perceived to be rich, the market is giving them higher value as we can see in the market but the guy who is going to get demerged, their shareholders could face an erosion in value?
A: Absolutely, but then, structures could be worked out. Those existing shareholders could get compensated in some way in terms of shares of the new organisation. They could be taken care of but whether adequately or not, that would be an issue. Going forward, very large players with balance sheet size of anything, between Rs 20,000-40,000 crore would find it really taxing to raise resources to meet these kinds of very stringent RBI requirements. So, if RBI is very steady on this, I personally feel that the players may not find it easy to go for a license now.
Q: They can obviously be strict about CRR, SLR because it kicks incrementally from day one. How will there be a let up on that? Do you think that atleast in priority sector, we know most of the banks also don’t meet it most of times or have not been meeting it? You have already given the license, they are in the industry for two years or so, you can’t de-license them. Basically that will be an issue like it has been in the past, some strong words and then we postpone it?
A: I don’t think that this time RBI is looking at it this way. RBI is pretty serious about it. Most importantly, RBI as a regulator has been one of the very efficient regulators and they carry certain penal provisions with them which they exercise very exceptionally, very rarely. However, nobody stops them from exercising those powers.
Q: How do you see the profitability of these new banks?
A: Initially, running these banks creating 25 percent branches in rural areas, putting up technology platform, make the necessary capital expenditure is going to be a challenge. So, until and unless a person has a deep pocket and a long-term commitment to this business, profitability initially is going to be an issue.
Q: Suppose you are a shareholder of a company which has announced that it is going to float the Non Operating Financial Holding Company (NOFHC) which will own the bank. Your expectation will be that in the first two years one must be prepared for a share fall?
A: I wouldn’t look at it this way. One should look at it this way. What the shareholder will look for is the return on their investment. If a company gets a license and if that company has necessary wherewithal to run this business successfully and properly and with minor capital expenditure here and there, shareholders will feel definitely benefited. But a completely new organisation which is into a completely new business, then there could be some challenges and issues but it all depends up on the kind of promoters which are there.
Q: Do you see yourself actively being involved in any of the activities because Shriram Transport is seen as an aspirant and the company was there earlier today saying that they are working out the nitty-gritty’s?
A: We are a small shareholder - that’s about all.
Q: So Piramal will not take an active interest?
A: We will see as things evolve before us.
Q: There is a rule which says that they don’t want two groups mixed in one of the clarifications. Has that stymied Piramal’s hopes of you will see a way around it?
A: As far as this transaction is concerned, we are a very small shareholder. Therefore, we would like to watch things and see things how they evolve. As of now, it will be very difficult to say anything.
Q: In your estimate, how many people do you think will make the grade?
A: I think minimum four, maybe maximum six-seven.
Q: Every time there is talk for banking license, there are always talks of M&A as well and many of these smaller banks start moving higher in hopes of getting acquired. Based on the guidelines, do you see the necessity of a perhaps some group going the M&A way to get the banking license?
A: It could.
Q: The rules allow it you think?
A: There would be issues. In any banking system, any M&A transaction happening, RBI has to play very active role. So, it could happen but RBI is very stringent in assessing these things and permitting people to acquire banks.
Q: Anyone who is running up some of the smaller banks in the hope that there will be M&A activity could be playing a dangerous game you think. It doesn’t come easily with RBI?
A: It doesn’t come easily. In fresh licenses, they are so strict. In M&A, one has to have their blessings and that would make it go through a huge due diligence and huge scrutiny.