The Reserve Bank of India (RBI) has issued clarifications on ‘new bank licenses’ after receiving 443 queries. The majority of the queries pertained to holding company structure, relaxation for non bank finance companies (NBFCs) converting into banks and having to contend with regulatory requirements (CRR, SLR, PSL). While providing eligible applicants up to 18 months for setting up the banks (v/s 12 earlier), RBI has not changed its stance on the holding company (hold co) structure norms.
The RBI reiterated that new banks would have to meet all regulatory requirements on all assets that will be transferred, including SLR, CRR, and Priority sector loans as is applicable for existing banks. They will be allowed to convert their existing branches in Tier 2-6 cities into bank branches. Tier 1 branches will be permitted to operate in Tier 1 cities with certain conditions. Further, even priority sector requirements (40% of adjusted net bank credit) will apply and new banks will have to have 25% of their branches in ‘unbanked rural centers’. Separately, even insurance and asset management to be under hold company.
On balance, it appears any existing financial entity or NBFC will have to rework its business model if it wants a banking license. In contrast, a large corporate with an established track record having “no exposure in financial services” may be the best positioned.
Few Questions for Potential Entrants ?
While most of the large industrial houses and NBFCs have indicated interest in applying for licenses, we raise the following questions: 1) Why would industrial houses want to float a bank given just 15% stake, significant regulatory scrutiny, no possibility of borrowing from the bank, investment in management time and capital?; and 2) Why would NBFCs want to convert into a bank and bear the cost of SLR/CRR and priority sector loans?
RBI will act on the side of caution and even those applicants that meet the eligibility criteria may not be given a license, per the RBI. In our view, NBFCs promoted by non-industrial houses and industrial houses with diversified ownership will likely have a better possibility of being issued licenses.