THE NEW PRIVATE BANK’S REGIME

[Dr. Sanjiv Agarwal]

Just before independence day, on 13^th August, 2010 the age old Bank of Rajasthan Ltd goes into the hands of ICICI Bank Ltd, loosing its name, brand, glory and all sentiments attached to its name and its logo of clock tower, Udaipur. While more old banks may fall prey to such inorganic growth hunger of banks wanting to become bigger in short run, another major development going to be in the banking space is the entry of new private sector players in the banking arena. It is no doubt that our banking system needs to grow in size and sophistication to meet the needs of today's economy. There is a need felt to extend the geographic coverage and access of banking services. This calls for entry of new private sector players in the field of banking given the fact that 70 percent of banking is still dominated by 27 public sector banks. Reserve Bank of India (RBI) has very recently issued a paper on entry norms for new banks.

New Banking Licence : Highlights

-                     Discussion paper on RBI's approach on new bank licence released for comments

-                     Discourages large business houses and sensitive business segments to enter banking space.

-                     New banks to be committed to financial development, financial inclusion and providing services to all sectors of society .

-                     Foreign shareholding (FDI, NRI, FII) in new banks to be capped at 50 percent with a ten year lock in lock in period .

-                     Corporates to have diversified holdings and clean track record .

-                     Real estate business can not enter banking area.

-                     Capital base to be Rs 500 to Rs 1000 crores.

-                     Regional rural banks may be allowed new management.

-                     Preference for non banking financial companies and high capital.

-                     NOC required from banks, regulatory and investigating agencies, CBI, enforcement directorate and revenue departments.

-                     Restrictions on using own brand or having own people on board

-                     New banks to take on financial inclusion in rural and unbanked areas

 

Banks in India at a Glance 80               Commercial Banks 27                Public sector Banks                    (51% Government holding) 15                Old Private sector Banks 7                    New Private sector Banks 31                Foreign Banks 86                  Regional Rural Banks 4                    Local Area Banks 2123              All Cooperative Banks

The new banking licences would result in expansion of banking activities and services and ensure financial inclusion, stability and soundness in banking system. Today many large industrial houses can use their resources to expend  the reach of banking, especially in the rural India without compromising on the stability of the financial system. Infact, private players can leverage up on their managerial acumen and entrepreneurial skills to penetrate in unbanked areas and help in achieving financial inclusion.

For new banks, RBI has stipulated stricter capital requirement of Rs 300 crores  with a cap of 50 percent for foreign ownership. While non banking finance companies will be considered for new licensees, real estate companies or promoters of such companies may be discouraged. Business houses  could be considered but with proper safe guards as to arm's length distance with banking business to avoid  related party lending and transactions .

While RBI would impose entry level restrictions and have stricter norms on use of funds, it will have to be borne in mind that the promoters would also expect a reasonable return on capital. On use of funds , RBI even presently has exposure ceiling for banks which is 15 percent of capital funds in case of a single borrower and 40 percent of capital funds in case of a group. Subject to board's approval, it could go up by another 5% percent for infrastructure projects and to 25 percent for oil companies which have issued oil bonds. There are exposure limits to real estate, capital market etc. Prudential limits and risk weightage will ensure neutrality of portfolio.

Large NBFC's with pan India presence and infrastructure which are financially strong may be able to meet capital criteria and are at a competitive advantage. Not only this, their customer base and financial expertise would also help. Such companies are already doing business in SME segment, retail  finance and housing loans etc.    In case of business houses , business groups should be well diversified in terms of shareholding and majority of the board members must be independent including its chairman who should be a non executive. Not only this, promoters and directors would have to get clearance from various regulatory and investigative agencies. The idea is to have only serous players for entering  the banking environment. It is even suggested that such new entrants could be asked to take over regional rural banks which are already starving for capital and business acumen. One thing is sure- this time, new bankers would be asked to have their mandatory presence in unbanked   areas with population of less than 50000 lakhs. Not only this, there will have to be a business plan in place.

However, denying entry of private business and industrial houses may hinder the entry at initial stage itself. What could be allowed is promoters or groups with sound track record with adequate checks and balances. Prudential exposure clients duties or suppliers may not be allowed to benefit from the lending and discrimination of competitors could be checked. Entry levels based on higher capital requirement would also act as barrier  .  RBI is also looking at a structure which could be such that the bank can be ring fenced from the other financial and commercial entities and activities of the group.

With new era of banking, India going to usher into  now , we can see big names such as LIC, IFCI, or companies like LIC housing Finance, other major housing finance companies, NBFCs etc turning into a banking outfit. Competition is going to be tough for existing players including those in public sector. There may be more competition amongst banks. More competition would mean more pressure on profits, particularly for young private sector banks. With shortage of banking human resource, retaining personnel and grooming new ones will also be important.

The entry of new banks is welcome in a country like ours where a major population is still deprived of banking facilities. This will certainly promote formal financial inclusion leading to inclusive growth, financial literacy and at the same time enhance competition resulting in improved quality of services at reduced costs. It is hoped that the new banks would be able to play a more meaningful role in financial inclusion and economic growth as they shall be able to invest resources in technology and partnership for financial inclusion, thus fostering inclusive economic growth.