Chillin' out till it needs to be funded
RBI has made quite far reaching progress in India’s 2010 Budget decision allowing new banks to take root in the country. Enabling clauses in this edition of the discussion paper as flagged earlier by us in April, include higher min capital requirements to Rs 3000 to Rs 10000 million from the earlier Rs 2500 million which was inadequate. Housing Finance cos are not expected to be a liability under the new regulations despite norms on real estate exposure and such NBFCs could make for great banking starts. If the Canadian model is adopted, widespread ownership of equity may be maintained over the life of the bank by limiting each individual/entity’s holding to 10%
The limit may not remain at Rs 10000 million unless the business houses and Finance companies step up to the plate and accept the challenge, but this move is clearly a signal for future banking companies to pare exposure levels and build larger capital adequacy base to proceed towards a banking company using its own and rural branches of smaller banks.
The RBI has also allowed business houses to take over rural banks whether cooperatives or other wise in this tentative but comprehensive first step towards the final regulations. Thankfully, there is also a negative list disallowing real estate NBFCs and underlining that a NBFC track record alone may not be enough for the new bank to be approved to function by the Central Bank
Religare would definitely be one of the groups setting up a banking company. Foreign holdings tentatively capped at 50% should be an enabler Also though unlikely, the first few applicants could bring this Foreign component down to 26% as in other sensitive sectors. Foreign partners in this cycle would not include established players like Goldman Sachs, GE or JP Morgan. India has not given new licenses since the Australian banks in 2006/7 and then Goldman Sachs this year in March. Indian private banks were set up back in 1994/5. Minimum and maximum caps for promoter holdings are being put in the new regulation and comments are invited at this time. Also cross holdings will be closely monitored. Basel 3 bank cross holding regulations may also apply in the new banking companies’ market book. Financing Structures would thus underline promoter credibility and establish staying power for the new banking companies. Foreign holdings of 50% will have a 10 year tenure(lock in) and will attract quality long term investment.
Promoter holdings as per current thought can be capped at anywhere between 5% – 40% the limit coming down from 40% as and when bank capital increases beyond Rs 2000 crores. Securitization and other forms of capital enhancement are also likely to be encouraged in a controlled regulatory supervision that will enable banks to reach critical size.
We currently have 1721 urban cooperative banks and 402 other cooperatives that cannot be repurposed for commercial baking but would ease corporate entry even into unbanked markets using easy urban pliability of business as a profitability facilitator. Probably the ssame will be put up for negotiation if limits foreseen on promoter credibility are maintained. The Bank of Punjab and YES Bank examples show the difficulty of ramping up without a cosmopolitan focus, with YES Bank managing quite admirably with limited urban access. If urban cooperatives experiment hads indeed been abandoned, the same should be let to industrial houses to enable quicker start, as some have the branches and the control systems at the rudimentary level to facilitate repurposing.
Local Area Banks are not the solution for India’s 70% unbanked population, semi urban areas still have 15900 persons to a single branch and priority rural lending and branch network limits continue to be 40% and 25%