Muthoot Finance rallied 7 per cent today, after the company announced its intent to apply for the new differentiated banking licence, the draft guidelines of which were put forth by the RBI on Thursday. Muthoot Finance, was one of the contenders for the banking licence last year, but was not granted a licence. With the RBI now coming out with new guidelines for setting up of payments as well as small banks, the company may be back in the race once again, possibly for a small bank licence.
A payments bank according to the RBI’s guidelines will accept deposits, but will not be allowed to lend. On the other hand, a small bank will mainly carry out basic banking activities of taking deposits and lending to small farmers, small businesses, micro and small industries and unorganised sector entities.
As per the guidelines, existing non-banking finance companies (NBFCs) can opt for conversion into small banks after complying with all legal and regulatory requirements. The company is such a case should have a minimum net worth of Rs 100 crore.
Muthoot Finance is the largest gold financing NBFC in operation for more than 70 years. The company has a net worth of about Rs 4,200 crore as on March 2014. Headquartered in Kerala, the gold loan NBFC has a network of 4,270 branches, 65 per cent of which is located in southern India. Muthoot has a gold loan book of about Rs 21,600 crore as on March 2014.
Given the RBI’s intent to keep the operations of the small bank restricted to nearby districts in a cluster of States or Union Territories, to exude “local feel” and culture, Muthoot Finance’s strong presence in Kerala, may just work in its favour. Also, the management believes it can play a larger role thanks to its rural reach, with almost 60 per cent of its presence in the rural areas.
But it is still very premature to pin down the actual impact and possible benefits to the company, given that these are only draft guidelines proposed by the RBI, which will get finalised in due course. Even the board of Muthoot Finance will have to finalise the finer details before applying for a licence.
For instance, the guidelines have stated that the stake of promoters in the bank in excess of 40 per cent has to be brought down to 40 per cent within three years from the start of the bank. At present, Muthoot Finance is a closely held family-owned business with promoters holding 75 per cent stake.
However, till there is more clarity on the final guidelines, and the licenses are finally awarded, the stock of Muthoot Finance may continue to party, as it did the last time around, on the possibility of becoming a bank.