Chillin' out till it needs to be funded
Indians are raring to open new banks with NBFCs being inadequate for the brand aspirations and the global deal making capabilities of the local industrial houses like the “Tatas and the Birlas” and indeed even Reliance and indeed Sardarji’s Religare.
However, there are significant problems with the structuring of the new deal for such bank projects. RBI has not increased any requirements for base capital, leaning with the MoF on keeping the same regulations as now. they have also put such projects in a bind capping their initial equity requirements to a 10% for the promoter houses. Thus even if they hold a higher stake when the bank is formed the same would have to be divested in off market deals with other like minded visionaries in the industry or through the public IPO option limiting their stake to 10%
We will be $2 trillion in the next 3-4 years as an economy, maybe even less as the dollar finds its levels
While we believe Banking may suffer from the current minimum requirement of just $25 million in base capital, it may still get a diversified equity holding structure to alleviate risk and promoter concentration concerns with the 10% cap. It is early days yet however, and the industry may benefit from increasing both these limits. Bank capital is proven to be the only support for the bank in times of distress as just gone by, and having a larger quantum of it may be essential to make sure the bank does not get stunted in size or in promoting fair lending with a miniscule capital base.
Also, after 20 years of reforms, there is a case for greater trust in the market driven industry of the day where promoters ar eless likely to keep the bank projects subsidiary to their own motives. The availability of cross industry expertise in fact would mean a bigger probability than ever for these new banks’ to struggle for any business from their “parent” houses.
Greater integration between these related projects or even un related ones may only be possible a decade later when their size is more in 100s of millions of dollars than these mini projects that will start the process, as seen in Banking 1.0 and the private sector grown Life Insurance, Mutual Fund and even the Pensions market.
Also, next we would expect a greater push from the top 3 MNC players that each have grown to INR 1 Trillion in assets ($250 million) across HSBC, Citi, Stanchart and more in IDR public offerings to grow global bank franchises. While it is noble to think of protecting homegrown brands, India can set the example by giving greater freedom to those with $100 million and more in global assets to come up to potential in the India market and leverage public sector distribution where ICICI and Kotak are unnecessarily being recognized as bigger than the almost boutique status they have. No one expects the OCBC and DBS banks of Singapore for example to grow into megaliths overnight in Singapore and the economy’s requirements are much larger .
At this time these global banks also need quality support and backing for their own capital requirements and raising the bar would mean first giving them the bandwidth to operate on the same terms, ( that is critical) as we operate in their home markets.
Banking’s fiduciary role is a critical component of its size and the same leads to a fall out when there is an uneven compromise on promoter participation and minimum capital requirements. We are not trying to discover a hidden mid tier in India, where thousands of banks have failed in the US in the last one year. We are trying to establish new institutions that can support this giant Economy’s growth, that will add trillions in assets every year and we need institutions empowered to do that. The SBI, HDFC and ICICI experiments ( because that is all they are right now in the global economy) may well never reach anything substantial unless a higher size and competition value is ascribed to ventures in the sector.