Bank licenses: Probability Vs Possibility for applicants

Prabhudas Lilladher has come out with its report on bank sector. According to the research firm, apart from corporate governance standards, financial inclusion will remain a key differentiator where retail NBFCs score well.

"RBI has released its final guidelines on bank licences maintaining status quo on most metrics but giving in to FinMin's suggestions of allowing real estate/broking cos to apply. Though corporate houses can apply, RBI has re-emphasized the importance of clean corporate structure/track record and also a clear financial inclusion plan where NBFCs score but guidelines still are silent on their transition timeline for SLR/CRR and PSL compliance. Best plays would be listed NBFCs (Retail focused- MMFS/Bajaj/Shriram; wholesale- IDFC/L&T finance) and weaker private banks (Dhanlaxmi /Karnataka /Lakshmi Vilas - acquisition targets).

Status Quo except allowing Commercial RE/broking to apply: Most of the final guidelines relating to holding structure (through NOFHC), capital requirements (Rs5bn initially), promoter holding (40% to start with), FII holding (49% cap) and corporate governance/exposure norms have remained same. Incorporating FinMin’s suggestions, RBI has in its final guidelines removed restrictions on real estate/broking companies to apply for licences though they still retain the final authority in granting the license.

History of bank Licenses: Allowing corporate houses without any sectoral restrictions increases the pool of potential applicants. Of the 12 new licences issued, RBI has granted licences to Financial institutions (four), corporate (Four) and individual professionals (Four) with a relatively low success rate for Corporate/individual professional promoted banks (four of eight have been merged with other banks). Though RE/broking cos have been permitted to apply now, subsidiary holding structures would constraint prospects of real estate companies. Apart from corporate governance standards, financial inclusion will remain a key differentiator where retail NBFCs score well.

Exhibit Questions remain on transition: RBI has maintained status quo on NBFCs, requiring them either to convert into a bank or move operations to the new bank, but even the final guidelines are silent on possible transition timeline for their PSL and CRR/SLR compliance. Retail NBFCs will find CRR/SLR compliance difficult whereas wholesale NBFCs will have a challenge on both. Industry experts have been recommending a transition time to clear the uncertainty but that still remains a grey area. (Highlights from our concall with Mr.Ashvin Parekh, Head, E&Y India Financials practise on page 2).

Impact Analysis: (1) Small private banks: Though the guidelines do not talk about inorganic growth, small regional private banks are likely acquisition candidates. The list but fundamentally weaker banks like Dhanlaxmi/LVB/Karnataka are easier acquisition targets. (2) Listed NBFCs: 7-8 likely in the fray among which IDFC/L&T finance score on dispersed promoter holding but retail NBFCs score on financial inclusion. (3) Existing Banks: Kotak/Yes attained only ~0.4% market share each in 5 yrs of their operations and with finalisation of Licences expected only by FY14 end, near term impact will be negligible but market dynamics will get more competitive over the long run if RBI issues 4-6 licences," says Prabhudas Lilladher research report.

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