© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
April 1, 2013 7:15 am
In India, everyone wants to start a bank, with dozens of companies already vying to win one of the first new banking licences to be issued in more than a decade.
But many of those poring over guidance issued last month by the Reserve Bank of India ahead of an interim deadline next week are already finding their plans under threat, waylaid by complex and uncertain rules that could undermine a rare opportunity to inject new competition into an otherwise slow-moving sector.
Many of corporate India’s biggest names – from the Tata and Birla groups to both sides of the divided Reliance empire – are seeking to take advantage of the RBI’s decision to allow large industrial conglomerates to apply for the first time. Myriad financial services businesses are also in the running, from local brokerages and non-bank financial companies, along with a few global private equity houses.
“From what you hear there are at least 100 groups looking at this,” says Mohandas Pai, a former executive at IT outsourcer Infosys, who is also part of a bidding consortium. “But they are discovering it’s not going to be a very easy opportunity.”
Final applications are due in July, and with just four or five licences expected to be awarded, at first glance it is not difficult to see why so many are keen.
Indian banks are growing quickly, with assets of $1.5tn last year, and the country is set to increase its share of global banking revenue to 3 per cent by 2015, a figure that has doubled in just six years, according to consultants McKinsey.
The existing competition is not that threatening either, given that lumbering public sector lenders still make up about three-quarters of the market. Applying for a licence also requires little capital, at just Rs5bn ($91m).
The performance of Yes Bank and Kotak Mahindra, the two institutions to win licences the last time they were handed out in 2003, is equally reassuring. Both have built profitable franchises and provided handsome returns to shareholders, mostly by targeting corporate borrowers and affluent urban consumers.
But this is where the problems begin, given that the RBI seems set on stopping others following the same lucrative path. Instead they want any new entrants to focus more squarely on India’s huge “unbanked” population, with regulations requiring at least a quarter of branches to be opened in areas with little in the way of existing banking services.
Some companies, such as the financial services arm of Mahindra & Mahindra, which gives tractors and truck loans to farmers, may benefit from these rules. But such stipulations are still likely to mean lower profits for whichever groups win out.
All applicants must also place any existing financial services businesses into a specially created holding company, potentially requiring larger corporate bidders such as Birla or Tata to conduct complicated and expensive internal rejigs.
The RBI’s guidelines, meanwhile, include a clause demanding that all contenders be “fit and proper” to run a bank, a line many analysts think is intended to weed out some of the country’s more adventurous tycoons.
Smaller non-bank financial services groups, such as vehicle finance group Shriram Transport, face different challenges.
In time, a banking licence can provide such organisations with more stable sources of finance, allowing greater leverage, and generally earning a higher stock market valuation.
But in the nearer term, these groups face new costs, for example from hiring staff and building branches, while bank status could place restrictions on their existing businesses.
Wealthy individual investors and private equity groups such as US-based Blackstone are also examining their options – although they are allowed only a 5 per cent stake in any applicant, and will face restrictions on how quickly they can sell out.
“We’re looking at this, but you [have] to be prepared for a long haul,” says Parag Saxena, head of New Silk Route, an Asia-focused private equity house based in New York.
Requests for clarifications on the application rules must be sent to the RBI by April 10, probably thinning the field. Ravi Trivedy, formerly head of banking at KPMG India, says: “Many of them are going to say this just doesn’t make sense for us, and drop out.”
Those who stick it out then face further delays. The RBI’s timetable suggests a decision later this year, but India’s forthcoming national elections, due next spring, may delay that. “We don’t expect anything to happen until later next year”, says a senior figure at one applicant company.
Over time, however, analysts say the new banks could have a profound impact, just as was the case with the dozen new licences that have been handed out over the past two decades.
India’s most productive, profitable and innovative banks resulted from this process. Together they now have 14 per cent of the market, and, in HDFC Bank, the country’s most valuable institution by market capitalisation.
In spite of the difficulties ahead, there are still many more who want to try to repeat the trick.
Please don't cut articles from FT.com and redistribute by email or post to the web.