See larger number of bank licences being issued: Experts

Below is the interview of AK Purwar and Santosh Singh with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: How many licenses are you expecting at all? Last time around only two people got, Yes Bank and Kotak Mahindra Bank, how many will get this time?

Purwar: I think this will be a little larger number this time because the kind of agenda and kind of expectations, which the market has and we all have is that this time the licenses would be more focused on the organisation, which can work for financial inclusion, there could be a lot of encouragement to highly specialized institutions focusing on infrastructure, maybe healthcare education, maybe services sector. So two things, financial inclusion and encouragement to specialization, these two will lead to a larger number of licenses being issued this time than the previous time.

Latha: Will the Jalan committee trade where noone has traded before in India, conglomorates. The other himself has expressed himself against it but Dr Jalan could have a different view, what is your view?

Purwar: My feeling is that Mr Jalan would be very open, extremely flexible and whatever is required to be done at the present juncture of the economy, he will not hesitate to take some bold decisions.

Sonia: So far the companies or the corporates that have not withdrawn include some of these names like Larsen and Toubro (L&T) Finance, Bajaj Finance etc but if you had to put your bet on a couple of companies that might get the license and you would have to recommend a buy now, which ones would they be?

Singh: We don’t think that banking license for non-banking financial company (NBFC) could be a very big positive given the quality of this NBFCs which in our opinion can get the license. So our opinion is something like an IDFC can get a license, something like an L&T Finance can get a license but at the same time, our view has also been that these stocks - other than IDFC if I look at most of the NBFCs, which can be a contender for the license trades at more than 1.5 times book and at those multiples you get a bank, which is already there with sort of 20 percent CASA ratio and these NBFCs can think about moving to that position in next 4-5 years. So other than IDFC we cannot see something which can be bought just because of the banking license.

Latha: Whatever be the immediate repercussions, they have to keep cash reserve ratio (CRR), statutory liquidity ratio (SLR), they will have some problems that come with the banking license but would you say an NBFC getting that license is their only ticket to growth so they become medium-term a very good bet?

Purwar: Let me put it little differently. If you analyze some of the NBFCs, the kind of infrastructure and the branch network in which they have succeeded in creating and also in terms of services which they were offering barring the deposit taking, they are offering almost whole range of services. So banking license is a logical extension to their existing business and it should drive growth, in respect of some select NBFCs.

Latha: Do you think Mr Jalan will also trade on other areas, brokerages and real estate companies, will he go there as well?

Purwar: To be candid with you, I don’t think so because all said and done brokerage business is in dumps today. Even in the present stage of the economy, it is very difficult to say as to which way it is going to go. My assessment is that you would be very careful. I would like to - as I said in my earlier statement that the agenda would be financial inclusion and encouragement of specialisation and there he would like to focus more. I don’t think that we should attach a lot of importance to either brokerage or real estate businesses.

Sonia: Since you have been doing the number crunching on this, just to get a sense of what the exact impact on the return on equity (ROEs) will be for a company like L&T Finance or even something like an IDFC, what should we expect as the impact?

Singh: We expect the ROEs to fall to single digit at least in the near-term for next four-five years and at the same time our biggest worry is the cost of branch expansion because the cost of doing business of a bank is much more higher than an NBFC and the only reason why NBFCs do better is because of the lower cost at which they raise fund and because of the specialization through which they can charge higher yields. So first point is that since these companies will take a lot of time to mobilize the CASA deposits which can compensate for the higher cost of funding, we will see the ROEs declining significantly and we expect single-digit sectorally. L&T has already fallen to single digit but in normal circumstances also we would say around 5-6 percent should be the ROEs for next three-four years.