Coming soon: New private sector banks

The Indian banking sector prided itself as being extremely resilient in the wake of one of the biggest financial crisis. It emerged relatively unscathed from the 2008 credit crisis, while banks across the globe failed. Over 100 year old institutions like Lehman Brothers and Merrill Lynch floundered. They either had to be bailed out, bought over, or left to sink. Now in continuation of its conservative stance, the Reserve Bank of India (RBI) recently came out with its long awaited guidelines on the entry of new banks into the sector. Now while financial inclusion in the country is still part of agenda, having new banks which are stable, conservative and ethical is a foremost concern for the regulator.

Ten banks were licensed in 1993 in the first wave of liberalization in the country. Almost a decade later two new private banks were formed - Yes Bank and Kotak Mahindra Bank. This fresh round of licensing is expected to see 2-3 new banks entering the system. However a few stringent guidelines need to be followed.

Who qualifies and who loses out?

Only companies that are in the private sector can apply for the new licenses. Thus players like Power Finance Corp., Rural Electrification Corp. and LIC Housing Fin. are out of the fray. Plus the aspirants cannot have exposure of greater than 10% of their revenue or assets to the real estate and brokerage business. This may see Indiabulls Fin, Indian Infoline and Edelweiss sidelined.

The promoters of these banks also need to have diversified ownership; sound credentials and integrity. NBFCs (Non banking finance companies) and companies that want to open a bank will need to have a decade long track record in running their businesses in order to be eligible for a banking license. Exposure of these banks to their promoter company should not exceed 10% of their capital and group exposure will be capped at 20%. Thus, using the bank as a front to fund various group activities will not be allowed.

We had recently conducted a poll on which is the most trustworthy business group in India The Tatas emerged as the winners with over 60% of the votes. The Tata Group is present in almost every sphere of business in India; except for banking. Do you believe that the Tata Group will also make a good bank? You can share with us.

Additional requirements

The minimum paid up capital is set at Rs 5 bn for these new banks, and they will need to be listed on the exchanges within a period of two years. This new bank will need to be set up through a holding company (HC) and the HC should hold at least 40% stake in the first five years. This will be subsequently brought down to 15% within a 12 year period. Foreign shareholding in these new banks will be capped at 49%. Plus in order to ensure objectivity on the board level, at least 50% of the board (of directors) will need to consist of independent directors. These new banks will also need to adhere to stringent capital adequacy requirements and have a robust technology platform to manage their systems.

The way forward

We have faith in banks to keep our hard earned money safe as well as to finance the purchase of the cars we drive and the homes we live in. Thus we agree with the RBI's criteria of having companies with a long standing track record and integrity, to be able to run a bank. Stringent capital requirements, having independent boards, and limits on group exposure will also ensure that these new banks are financially sound. Plus, it will help ensure that these companies are in the business for the long haul. The private banks which were set up in 1993 focused more on India's urban population. Funding agriculture, small industries, and opening branches in remote villages was mainly left either to the public sector banks or various non-banking finance companies. We welcome the entry of these new age private sector banks which will have to open at least 25% of their branches in unbanked rural centers. With 50% of India's population still unbanked, we hope that these new private sector banks can do as much for the untapped rural India, as the old private sector banks did for Urban India.