The Tata Group of companies is almost omnipresent in this country. They make everything, right from salt to software. But their dream of participating in the Indian banking industry is still far from being a reality.
In his budget address, Finance Minister, Mr Pranab Mukerjee, spoke about awarding banking licenses to certain entities. This list included non-banking finance companies (NBFCs) as well as industrial houses. However, the RBI as usual has been conservative in its stance. The central bank and finance ministry have now come to a conclusion that big corporate houses should not to be allowed to enter the business at this stage.
Now, along with the Tatas, the hopes of groups like Mahindra & Mahindra, Anil Dhirubhai Ambani Group, AV Birla Group and L&T have also been dashed. The main reason behind the RBIs decision was the apparent risk to the bank's integrity from the groups' other business interests. The need to maintain domestic stability, especially in times of crisis was also a factor. But, with this even other aspirants like Indiabulls, Shriram Finance, Religare and SREI Infra's prospects are uncertain. They may not receive this coveted license on account of cross-holdings in group firms.
Yes Bank was the only bank to receive a greenfield banking license in India over the past 16 years. Now, according to a leading business daily, a maximum of four banks licenses will join its league. These new banks will be promoted by pure-play NBFCs and would need to meet strict eligibility criteria. The initial promoter holding would need to be 40%. The aggregate foreign holding limit would be capped at 49%. The minimum paid up capital would also be higher at Rs 5 bn, versus Rs 3 bn for existing banks. These new banks will also have to open certain number of branches in rural and semi-urban areas. This will help boost financial inclusion in the country.
We agree with the central bank that business houses should not be awarded licenses as of now. It would be better to wait until various teething problems are solved. With corruption and scams rampant in the country, even the slightest of a conflict of interest appears suspicious.
Having a higher capital base and a limit on promoter holding will also ensure that the parties are serious about getting into the business for the long haul. A slow and steady approach towards financial inclusion, rather than a sudden move will be beneficial for the sector over the long term. But, for the receivers of this 'golden ticket' it would be a wonderful opportunity to tap into the soul of the economy. They will benefit from accessing low cost deposits, increasing domestic presence, and be able to improve shareholder value. When these new licenses are awarded, it will be one of the biggest reforms in the financial space post liberalisation.