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Last Updated : Aug 02, 2016 10:39 AM IST | Source: CNBC-TV18

RBI issues 'on tap' bank licence norms, bars conglomerates

The Reserve Bank Monday released guidelines for 'On Tap' licensing of private sector universal banks. The guidelines state individuals with 10 years senior-level experience are eligible to promote a bank but large industry houses have been excluded as eligible entities, although they can invest up to 10 percent.


The Reserve Bank Monday released guidelines for 'on tap' licensing of universal private sector banks.

Under this, applicants can now apply for a banking licence anytime as opposed to a limited-period window that the central bank previously used to open for applications.

The guidelines state individuals with 10 years senior-level experience are eligible to promote a bank but large industry houses have been excluded as eligible entities, although they can invest up to 10 percent.


Some of the other key guidelines state the universal bank has to list on exchanges within 6 years of business commencement and must have realistic and viable business plan. It must address financial inclusion and must open at least 25 percent branches in unbanked rural centres. 


In-principle nod for bank will be valid for 18 months from date of grant.

In 2004, the RBI had granted licences to Yes Bank and Kotak Mahindra Bank, which was followed by 10 years where no licences were issued. After Raghuram Rajan took over as central bank governor, he opened the banking licence window once again after which IDFC Bank and Bandhan Bank were issued licence and it was announced that an 'on-tap' licence regime would be introduced.

Commenting on the guidelines, Ashvin Parekh of Ashvin Parekh Advisors said this could be a good opportunity for professional non-banking financial companies that are not part of any conglomerate but large enough to enter into banking.

Ramesh Iyer of M&M Financial Services says although the company does not qualify as a candidate as per the guidelines, but the move makes banking an attractive space.

Iyer sees smaller non-banking finance companies with good reach partnering with entities that can provide enough funding to meet the minimum capital requirement norms.

Sunil Kanoria of SREI Infrastructure Finance, however, feels it is also important that RBI reviews guidelines for existing private sector banks and works out policy framework for co-operative banks and regional rural banks to open up opportunities for them to grow and access new capital. 

PH Ravikumar, Non-Executive Chairman of Bharat Financial Inclusion, Nirmal Jain of IIFL, V Vaidyanathan, Chairman & Managing Director of Capital First, Naresh Makhijani of KPMG India and Digant Haria, Vice Chairman & MD Antique Stocks Broking also shared their views.

Below is the verbatim transcript of the discussion.

Q: What did you make of what I could read? I could read out some of the eligibility criteria to you?

Parekh: In fact I was examining the same. This is in keeping with the draft guidelines that were issues earlier. More or less very clearly saying that the corporates or the business houses cannot really apply for a bank but at the same time, professionals particularly they can really either raise Rs 500 crore or if existing Non-Banking Financial Company (NBFCs), this is a very natural, nice way for professional NBFCs who are not a part of any business conglomerate or any business house to really get into banking. So, at least this was a requirement.

Earlier also if we recall when 24 applications were received for universal banks and then of course at that point in time only two licenses were approved, IDFC and Bandhan Bank. But even at that point in time one felt that there had to be a way for professional NBFCs who are large enough to become a universal bank to some way of moving and migrating into the banking system. And this seems to be a good part certainly. 74 percent right away because the original draft I had thought about a little lower level for foreign equity participation but 74 that is putting at par with the others, with the other existing banks is a very good move.

Q: Just listen to this. Existing specialised activities have been permitted to be continued from a separate entity proposed to be held under the NOFHC subject to prior approval from the Reserve Bank. Now would that be called specialised activity financing transport vehicles?

Parekh: No, actually we will have to see the guidelines a little more clearly but the point of view that RBI always had, even earlier also where the applications were being examined or when banking companies wanted to float NBFCs the principle was that RBI does not want the final customers to be at any disadvantage. So, they say that these NBFC and banking companies are competing in regards to their product offerings. Then in that case it creates an arbitrage against the customers.

Q: If at all you could it would have been a very quick read, but the on tap licences are here. Could you get a glance, do you think that now it is only a matter of time before we get an M&M Financial Bank?

Iyer: I thought my quick reading possibly I thought industry houses are not eligible, therefore it’s not us as a candidate but surely I think this is one move towards getting players who may want to look at banking as more attractive than NBFC is.

Q: Who do you think then will apply. Do you think there will be individuals who will want to start a bank, but who do you think will qualify given the qualifications?

Iyer: Maybe small NBFCs possibly may want to look at while of course the capital requirement is a little steep from a smaller NBFC perspective but maybe they would like to partner with someone, I somehow think there could be some partnerships which may emerge out of this, maybe a small NBFC and maybe another brokerage also whatever in the sense someone who is wanting to put in capital and someone who has a reach to go deeper, because there are some branches required for rural kind of a reach etc, and therefore I can see somewhere maybe some partnership may emerge out of this.

Latha: What have you made of this rule, do you think the rules are easy enough to elicit a lot of response?

Kanoria: I think it is consistent with the Reserve Bank of India (RBI) policy that they didn’t want a window open, close like that but for the banking system to have On-tap. So, whenever anyone who is eligible and fit and proper as per RBI who applies, they can open up. So, I think that is a good policy framework which is there.

However, what I believe in and what we have stated in the past from our chamber also, from ASSOCHAM, that what is required to review the guidelines which are there for the present private sector banks, the old private sector banks which were there, today you can’t have a shareholding more than 5 percent then you have to get approval. You need approval after 5 percent to keep up to 10 percent. So, I think for the existing because many of these existing banks who are there, small private banks, they can grow.

So, existing capacities which are there, I think what is required is many of the regional rural banks (RRBs) are there, many of the cooperative banks are there, so there must be some policy framework which can unleash many of these -- give opportunity, open them up so that they can grow, access new capital, fresh capital can come in just the way you are doing for new banks and create a mechanism. So, I think that is very much required.

Q: Do you see this as a huge liberalisation? Many people will come into banking?

Ravikumar: I don\\'t know whether many will come into banking but it is a huge liberalisation because if you see in the last 35 years licensing has happened only once in early 90s when the new private sector banks came. Thereafter we have two or three individual licenses which were given on adhoc basis not as a part of a structured licensing policy. Therefore I would say it is a huge liberalisation. Since corporate and those who have large other than financial business are not eligible, I think the number who would be eligible would not be very large. I would say it would be not more than, I am talking of serious players, it would not be more than 25-35 groups, who are serious, who have certain level of minimum critical mass.

Q: You said that you wouldn’t be surprised if you saw 35 more licenses, is it?

Ravikumar: No, 35 applicants.

Q: How many more licenses do you think this industry can stand? We already have 66 players now, I am counting all the payment bank and small banks.

Ravikumar: Small banks in similar space, I think we need at least two dozen licenses because today in the financial services I believe money is there to be made only in the customer segments around poverty line and the lower income group.

If you take case of housing finance companies, I don\\'t know whether you have noticed but in the last three months to six months and currently on the anvil there are 20 groups which have brought in or committed half a billion of capital just for housing finance. Therefore that space is large and will need more licenses. Therefore the choice between applicants is whether to be a small bank or to be a universal bank or not to be a bank at all and be just an NBFC.

Q: You think now you will get a walk through?

Jain: No, I can’t comment on that. In fact, we will study the guidelines and take it to our board first whether it make sense for us and whether we fit into it. It is too premature to conclude that is a walk over in fact, most certainly we had applied in the first place when the original universal banking guidelines had come and we didn’t get the licence, but a lot of things have changed in terms of digital landscape, in terms of regulatory environment, so we need to take it to our board and then take a call on that and its board’s prerogative so I can’t comment on it.

Q: What is so different in the rules, you may have an idea why the Reserve Bank did not give you the licence at that time. How come you will qualify more now anything that changed?

Jain: At that time they gave only the two licences and they were Bandhan and IDFC, so one was in the microfinance both the companies there is no prominent promoter or no prominent private sector interest in that, so I think what is changed is then that this time industrial houses are out, so at least RBI has taken a clear call that. This is a very controversial whether industrial houses should be given licence or not and as we know that industrial houses are net borrower and there can be conflict of interest for variety of reason. I think when they rejected the application of some 23 applicant including us they very clearly said that the rejection letter itself said that you are eligible for applying whenever guidelines are again announced or when the new guidelines come, so I think that is not a deterrent for any of the earlier applicant. Maybe, that time things were changing politically and somehow they just gave couple of licences and stop there. It wasn’t the wholehearted opening up of the sector.

Latha: Who do you think in the current space looks like eligible candidates?

Haria: I think clear candidates are these diversified brokerages, Edelweiss’s, IIFL’s, and the Motilal’s of the world because they fit in whatever criteria you just read out. They have been structuring their business in a way which offers a wealth management service, a lending service, everything that a bank would probably want to offer. So, I think those are the primary contenders. I don\\'t think the others like the gold finance or the vehicle finance are in any hurry for the licence because anyways the banking only side is restrictive for their kind of a business.

Latha: Do you think Capital First will fit in?

Haria: Yes, it definitely is eligible and it could fit in but I think even they are in the business where I think a few years they would want to tap more customers.

Latha: RBI’s historical record has been, it has been wanting to keep banking and broking separately. The kind of pain Axis Bank went through when it took over Enam and the RBI wanted to ensure that Enam’s directors don’t become Axis’s directors, there have been repeated attempts by RBI to keep broking business distinctly separate from banking which is why do you think the chance lies for the Edelweiss’s, the Motilal’s and the IIFL’s or is the chance a little brighter for pure NBFCs like Capital First or Shriram Transport, Shriram Sundaram, Cholamandalam, do you think it will be that variety who are not really big in broking?

Haria: Chances for them are really bright. In fact I could go on record and say that if those guys apply, they would surely get it. However, the thing is I don’t think they are in a hurry. Our interactions with them tell us that they are in no hurry to consider universal banking. Now, with everything which is changing, the strategy of everyone is becoming customers. The strategy is customer, it is not a banking licence anymore.

The days when Kotak got the licence, the banking licence itself meant a lot of things. I think now that line has got a little blurred and everyone is out there to first capture as many customers as they can and probably not spend two years of their lives right now just living up to the new regulatory requirements of a bank. So, I think those guys would definitely get it but they may not be equally excited for it.

Latha: Who do you think in the current space looks like eligible candidates?

Haria: I think clear candidates are these diversified brokerages, Edelweiss’s, IIFL’s, and the Motilal’s of the world because they fit in whatever criteria you just read out. They have been structuring their business in a way which offers a wealth management service, a lending service, everything that a bank would probably want to offer. So, I think those are the primary contenders. I don\\'t think the others like the gold finance or the vehicle finance are in any hurry for the licence because anyways the banking only side is restrictive for their kind of a business.

Latha: Do you think Capital First will fit in?

Haria: Yes, it definitely is eligible and it could fit in but I think even they are in the business where I think a few years they would want to tap more customers.

Latha: RBI’s historical record has been, it has been wanting to keep banking and broking separately. The kind of pain Axis Bank went through when it took over Enam and the RBI wanted to ensure that Enam’s directors don’t become Axis’s directors, there have been repeated attempts by RBI to keep broking business distinctly separate from banking which is why do you think the chance lies for the Edelweiss’s, the Motilal’s and the IIFL’s or is the chance a little brighter for pure NBFCs like Capital First or Shriram Transport, Shriram Sundaram, Cholamandalam, do you think it will be that variety who are not really big in broking?

Haria: Chances for them are really bright. In fact I could go on record and say that if those guys apply, they would surely get it. However, the thing is I don’t think they are in a hurry. Our interactions with them tell us that they are in no hurry to consider universal banking. Now, with everything which is changing, the strategy of everyone is becoming customers. The strategy is customer, it is not a banking licence anymore.

The days when Kotak got the licence, the banking licence itself meant a lot of things. I think now that line has got a little blurred and everyone is out there to first capture as many customers as they can and probably not spend two years of their lives right now just living up to the new regulatory requirements of a bank. So, I think those guys would definitely get it but they may not be equally excited for it.

Q: What is your sense, repeatedly I see this word resident individuals having 10 years experience? There were lot of individuals who applied if you remember who had applied for small bank licenses. Do you think all these guys start applying now?

Makhijani: People do have aspirations and I am sure that they will reapply because if you look at it, in the past also when people were not successful when this tap was open way back in 2001, only Yes Bank, few banks got it. Applicants who were not successful in 2001 reapplied in 2013. There were some of them who also applied for small finance banks. So, all I am saying is people will keep applying till they get a reply from the RBI. So, my sense is I would not say that people will stop from applying, people have aspirations to get into banking. So, I think it will continue to attract applications.

Q: Who do you think are the more likely winners? Digant Haria expects all brokerage companies and NBFCs, the Motilal Group, IIFL, Edelweiss, Indiabulls Group, Capital First, these were the names he mentioned, are these the likely candidates according to you?

Makhijani: All I am trying to say is that some of the names which you just mentioned they did apply for universal banking license. For variety of reasons they were not successful. Some of them reapplied for small finance banks and some of them were successful, some of them were not successful.

Even if you look at it today you have two universal bank licenses Bandhan Bank and IDFC Bank and close to 10 small finance banks. Now the market seems to be already flooded and if you look at from RBIs point of view, they are now willing to issue licenses and all but from the fate of those three payment bank licenses, people who have withdrawn, all I am trying to say is people will have to really think through their business plan and strategy as to how do they differentiate to be successful in this over flooded market.

Q: Your only issue will be how to put that Rs 5,500 crore together. And then yours will be the first candidate in the list into RBI's post box?

Vaidyanathan: You are running a bit ahead of your time because in our case we have foreign ownership which is substantially more than 50 percent.

Q: But 74 percent is allowed.

Vaidyanathan: Yes, I know it is 74 percent but we got to look into a lot more factors. I told you earlier in one of our programs that we understand very well that the opportunity is very large. We also understand that India is hugely under banked and therefore this is a huge step forward but as far as our company is concerned we have got to wait and see a large number of other implications as well.

Q: But is it all that lucrative now, aren't NBFCs making more money? The environment is a little less restrictive for you guys, is it really so mouth watering or tantalising to have a bank license?

Vaidyanathan: I do agree that this space is really very good. A funding is very much available and the opportunity is so very large in terms of penetration and so on and the last mile connectivity that NBFCs are able to give. So, any which way you look at it the NBFC space is right now quite good.

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First Published on Aug 1, 2016 06:20 pm
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