Tata Sons pulls out of bank licence fray

 

Mumbai: The Tata group withdrew its application for a banking licence, months before the Reserve Bank of India (RBI) is expected to open up the sector to a new set of new private banks in Asia’s third largest economy.

Tata ltd, the holding company of the Tata group, said in a statement that its “current financial services operating model best supports the current needs of the Tata group’s domestic and overseas strategy, and provides adequate operating flexibility to its companies, while securing the interests of the group’s diverse stakeholder base”.

RBI said in a press release that has accepted the withdrawal.

That leaves 25 applicants, including the Aditya Birla Group, the Bajaj Group and Anil Ambani’s Reliance Group, in the race for a banking licence.

Tata Sons added in its statement that said it had written to RBI on Tuesday withdrawing the application after a detailed evaluation of the “guidelines for licensing of new banks in the private sector” and analysis of clarifications.

Tata Sons is not the first business house to have a change of heart. In June, Mahindra and Mahindra Financial Services Ltd decided not to apply for a banking licence, saying RBI’s norms were not conducive for large and successful non-banking financial companies (NBFCs) to turn into banks
Chennai-based Shriram Capital Ltd has also decided to withdraw its applications, Businessworld reported on 30 August. However, there has been no official confirmation on this either from the company or RBI.

In September, Value Industries Ltd, a unit of Videocon Industries Ltd, withdrew its application for a banking licence, but the number of applicants remained same as Chandigarh-based KC Land and Finance Ltd, whose name was inadvertently not included in the list of applicants released on 1 July, found place in the list.

Other companies that are in the race for a new banking licence include L&T Finance Holdings Ltd, Religare Enterprises Ltd, IDFC Ltd, Indiabulls Housing Finance Ltd, India Infoline Ltd, Magma Fincorp Ltd, Edelweiss Financial Services Ltd, India Post—the Indian government’s postal department—and microlenders Bandhan Financial Services Pvt. Ltd and Janalakshmi Financial Services Pvt. Ltd.

Higher capital requirement in the form of statutory liquidity ratio (SLR) and cash reserve ratio (CRR) applicable to the new banks from inception is a deterrent for NBFCs, with existing loan books to seek a banking licence, analysts said, even as the mobilization of cheaper deposits will take years.

CRR is the portion of deposits banks need to park with the central bank on which they do not earn any interest, and SLR refers to a bank’s compulsory bond holding. Currently, banks need to maintain a CRR of 4% of deposits, while SLR is 23%.

New banks will also have to comply with the so-called priority sector lending under which 40% of the money loaned by banks has to go to certain segments such as agriculture, small businesses, retail traders, professionals and self-employed individuals. This is difficult to achieve for an NBFC with a large balance sheet.

According to the licensing norms, the new bank will have to be listed within three years and the promoters’ shareholding must come down to 40%. Within 10 years, this holding must be further pared to 20%, and by the 12th year 15%. This is also a deterrent, many analysts said, as the promoters will not be able to reap the benefit of the value they create.

This apart, RBI’s inclination to offer a banking licence on tap may prompt some of the companies opt out of the banking race for now as they can always apply later, experts said. Until this round, new bank licensing has been once-in-a-decade affair.

In the first round, RBI issued licenses to 10 private sector banks in 1994, shortly after the nation embraced economic liberalization under the P.V. Narasimha Rao-led Congress government. In the second round, licences were issued to two banks—Yes Bank Ltd and Kotak Mahindra Bank Ltd—in 2004.

“Between 2010 and now, a lot has changed in terms of economic landscape and in terms of expectation of regulatory changes in the baking sector,” said Shinjini Kumar, director (banking regulations) at audit firm PricewaterhouseCoopers Pvt. Ltd.

“The stress around timing may also reduce because there is also a talk of on-tap licensing, In this backdrop, different players may choose different strategy.”

Tata Sons said it is hopeful that RBI will issue banking licences on tap.

“We hope that RBI and the ministry of finance will periodically issue banking licences. We shall continue to monitor developments in this space with great interest and look forward to participating in the banking sector at an appropriate time,” Tata Sons spokesman Debasis Ray said.

The apex bank started the process of issuing new bank licences after former finance minister Pranab Mukherjee, in his February 2010 budget speech, announced that the country’s central bank would open up the sector and issue fresh banking licences with an objective to spread banking services in a nation where roughly 50% of adult population does not have access to banking services.

RBI issued the guidelines on new banking licence on 22 February and set a 1 July deadline for applications. A panel, headed by former RBI governor Bimal Jalan, will scrutinize the applications after the central bank screens them.

The February guidelines required new banks to operate under a non-operative financial holding company (NOFHC) and bring in a minimum capital of Rs.500 crore.

Ray of Tata Sons said that after filing the application, the company carried out a detailed evaluation of the RBI norms and found that its current financial services operating model suited it best.

“For example, about 64% of the group’s revenue is from international operations. The operating companies with overseas operations at times need to provide financing solutions to their customers. Since all financing companies in the group need to be under the NOFHC, there could be situations, wherein a given country is not a priority for the proposed bank but extremely important for an operating company. An equitable framework needs to be agreed on how some of these situations will be addressed,” he said.

“Overseas financing is further complicated as the law in some countries requires the operating company to partner with a local bank to set up a financing company. Compliance of such requirements would not be possible under the existing guidelines wherein all financial services entities in the group necessarily need to be owned by the NOFHC,” he added.

Following the nationalization of 14 larger banks in 1969 and six in 1980, RBI has so far given licences to only 12 banks in two phases, including conversion of a cooperative bank into a commercial bank.

In the past, the apex bank’s stated objective behind giving licences to new banks was to introduce competition in the banking sector, which was largely dominated by government-owned banks. This time, the prime focus is to promote so-called financial inclusion, or increasing the reach of financial services to the un-banked population in the country

RAHUL KUMAR GUPTA

PGDM,1st YEAR.

SOURCE:-MINT..