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FIs: Universal banking beckons - Views on News from Equitymaster
 
 
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  • Oct 1, 2001

    FIs: Universal banking beckons

    Indian financial institutions (FIs) are gearing up to transform into universal banks in order to become competitive. However, the strict regulatory norms with respect to CRR, SLR and priority sector lending are blocking their plans.

    FIs including ICICI and IDBI had requested the RBI to relax the norms, as they would require large funds if they were to strictly adhere to these norms. And this could elongate the process of transformation into a universal bank. As a result, the RBI is likely to ease the CRR and priority sector lending norms for those financial institutions, which aims to convert into banks.

    As against the current CRR norm of 7.5% for banks, FIs may be allowed to maintain CRR at 3%. This is the minimum stipulated requirement as per the RBI act. FIs are likely to be given some years to gradually reach to CRR level of banks. Apart from CRR, banks also maintain SLR of 25% (through investments into the government securities markets). If FIs were to follow SLR norms with immediate effect, it might create volatility in the government securities markets, which lacks the depth. This could force the Central bank to relax the SLR norms for FIs at least in the initial years.

    Even on the priority sector lending front, the RBI is likely to show some flexibility. The norm is already on the lower side for foreign banks at 32% as against 40% for domestic banks. These are some of the main glitches, which FIs are facing currently in order to become banks. Any relaxation on these norms is likely to clear the current roadblocks and could hasten the process.

    Some of the other main requirements applicable as per the Banking Act include change in the composition of the board by FIs, reduction in the number of subsidiaries, 25% of total branches need to be located in rural and semi urban areas and divesting stake in excess of 30% of paid up capital in their existing subsidiary companies.

    Although in the initial years FIs converted into banks are likely to face problems in completely adhering to these norms, the benefits are immense. Firstly, they will be able to diversify their portfolio from project lending to corporate and retail finance. On a larger asset base, they would be able to cater to accounts of public sector oil companies (for example: letter of credit, export credit, working capital loans), which are currently under the control of nationalised banks. Secondly, they will have access to low cost funds (saving and current accounts) enjoyed by only banks. This would reduce their average cost of borrowings, which currently stands on the higher side. Most importantly, it will offer immense cross selling opportunities and will make them competitive in the global markets.

     

     

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