Some big entities apply, some stay away
By R Chandrasekaran
CHENNAI: There were 26 applications seeking entry into the banking sector in India when the Reserve Bank of India closed the counter on July 1st. The big question is, will everyone get a banking license if they are found to be suitable?
Looking at the number of applications received this time, one thing is for sure. The interest among business houses have come down considerably or maybe they don’t want to get exposed to the central bank’s tougher norms, which may not be comfortable for them, or they don’t want to hear any negative news after applying for a license. The fact that it will not be a cakewalk prompted many to remain on the sidelines.
There is no doubt that the list of applicants include some of the big names in the Indian corporate world such as Tatas, Anil Ambani-led Reliance Capital, professionally managed Larsen & Toubro’s L&T Financial Holdings, former Citigroup’s CEO Vikram Pandit-invested JM Financial group, Bajaj Financial Services, Aditya Birla Group, government controlled or government participated companies like India Post, IFCI, LIC Housing Finance, SREI Infra Finance, and IDFC. These apart, Videocon-backed Value Industries, Edelweiss, south India-based Shriram Capital, and Muthoot Finance are also in the race.
However, there are also lots of big names missing from the list of applications. Prominent among them are Mukesh Ambani-backed Reliance Industries, Sunil Mittal’s Bharti group, which has a tie up with Wal-Mart for retail foray, Chennai-based TVS group’s Sundaram Finance, which has been in the financial services for six decades, and Ruia’s Essar Group, which had an unsuccessful bid on Tamilnad Mercantile Bank more than a decade ago. Mahindra & Mahindra, which was keen initially to foray into banking operations, decided not to seek banking license terming the RBI norms as discriminatory towards industrial houses.
The latest list of banking operations’ aspirants come on the heels of at least three global banks such as Morgan Stanley, UBS, and Goldman Sachs having surrendered their banking licenses in the recent past after years of lobbying with the RBI.
The central bank seems to be very clear in its approach towards new entrants and is fully committed to adhering to norms prescribed by it. This has been the case in the past too going by the flood of applications and the approved list.
Before the nationalization of banks in India in the 1970s, it was a prestige to hold on to a bank for many industrial houses. After the nationalization, banking licenses were thrown open to private entrants only in the 1990s following the liberalization process initiated by the then Finance Minister Dr. Manmohan Singh under the prime ministership of P.V. Narasimha Rao as India faced one of the biggest problems of balance of payments.
There were about 113 applicants for starting a banking venture in 1993. However, the RBI granted permission only to 10 aspirants. These included HDFC Bank, Global Trust Bank, Centurion Bank, Times Bank, UTI Bank (Now Axis Bank), IndusInd Bank, IDBI Bank and ICICI Bank. Of these, Global Trust Bank, which came out with much fanfare and expectations, failed to hold on to the trust of the public and collapsed in 2004. However, the RBI had acted swiftly to ensure that depositors’ money was safe and advised Oriental Bank of Commerce to take over.
Other banks have either merged or are operating on a stand alone basis. For instance, Times Bank merged with HDFC Bank later and Centurion Bank amalgamated with Bank of Punjab, which too was acquired by HDFC Bank subsequently. It was a case of reverse merger for ICICI, which promoted ICICI Bank.
Ten years later in 2003, the central bank opened its door again to the private sector generating 100 prospective applications. But only two could succeed. One was Yes Bank and the other was Kotak Mahindra Bank, which was earlier known as Kotak Mahindra Finance. There was one more CRB Capital promoted by chartered accountant C.R. Bhansali. However as the company collapsed, the central bank cancelled its permission.
Given the past record of granting only few licenses and the mergers that followed, it is quite clear that the RBI will be choosy and may not be granting license to everyone. RBI Governor Dr. V Subbarao had reportedly viewed earlier, “our effort will be to make that judgment as transparent as objective as contestable as possible…I want to say that not everybody who is fit and proper will be given a (bank) license because we expect the number of eligible applicants will be much larger than what is meaningful number of licenses we can give”.
Despite this statement from the RBI, Finance Minister P. Chidambaram commented that there is no ceiling on the number of new bank licenses. He added, “I don’t think there is a ceiling. I don’t think there is a number in mind. It all depends upon how many applicants are eligible applicants. The fact that somebody applies doesn’t mean he is an eligible applicant.”
It is a known fact now that both the RBI and the government are not on the same page on several issues such as cutting down of interest rates, threat of higher inflation, growth rates, and the lack of efforts on the part of the government to announce more measures to spur infrastructure. Therefore, it is of no surprise to many. However, it could certainly throw some interesting issues in the months to come.
Unlike the previous two times, the current norms seem to be stringent for new banking licenses since the central bank wants the new banks to focus on the unbanked areas too in addition to the priority sector lending. The reason why other bigwigs failed to join the race is due to the RBI conditions that big industrial houses’ book of accounts could come under its scrutiny. The central bank has put this as a pre-condition and it is understandable that many would not have liked this. The promoters’ holding will also come down to 40 percent when its shares are listed within a period of three years. Their holdings will further be brought down to 20 percent within a ten-year period.
There are about 26 public sector banks in India, whereas 22 banks are in the private sector and 56 regional rural banks. While there is no guesstimate of how many will get a banking license this time, there is no doubt that there will be hectic lobbying from the corporate world. It remains to be seen as to how the RBI will manage to come out from this lobbying and grant banking license.
It is also quite clear from the RBI Governor’s comments that it is not compelled to grant licenses irrespective of meeting the criteria. Though Chidambaram had stated that merely applying for banking license does not mean that they are eligible, his comments that there is no ceiling could only provide temporary solace to the aspirants. Ultimately, it will be a lottery this time too as to who gets a license.