Banking is serious business

The RBI’s draft guidelines for granting on-tap licences to new ‘universal banks’, which were rolled out on Thursday, has ensured more skin in the game by allowing only large corporates with at least 60 per cent of gross income or assets coming from financial activity to apply for such licences.

While the RBI did grant payments bank licence to big corporates such as Aditya Birla Nuvo and Reliance Industries last year, for universal bank licence, it has set the standards high. This is understandable given that a payments bank can only accept deposits and offer remittance services but not engage in any lending activity. The RBI though, has always been reluctant to offer universal bank licences to large business houses, as it could lead to unhealthy practices and pose a risk to the system.

While the RBI has stuck to its stance and not allowed large industrial houses to promote banks, they have allowed them to participate by holding less than 10 per cent in the bank. This is one of notable differences from the guidelines issued three years back for new bank licences.

“If it’s a large corporate, then they will have to have a significant NBFC business. In essence, you have to be a serious player in the financial sector if you want to own a bank,” says Kaushik Mukherjee, Partner, BMR Legal.

Hence, Reliance or Tata may not be able to apply, but Religare may be able to make the cut. While large corporates batting for banking licence have been excluded from the race, the RBI appears to have paved the way for NBFCs that had earlier given a ‘go-by’ to entering the banking space. For instance, the Shriram Group, Mahindra Finance and Sundaram Finance were reluctant to apply because the RBI guidelines did not permit the bank and the NBFC arm to co-exist.

Converting their entire NBFC business into a bank, would have been a challenge and involved huge costs.

The RBI now has given the option for NBFCs having a track record of at least 10 years to either convert into a bank or promote a new bank. There are two rules that indicate some room for leniency this time around. One is the need to set up the non-operative financial holding company (NOFHC) structure only if the promoter has other entities in their group.

“If a corporate owns an NBFC, and the NBFC converts into a bank; and additionally, there is no other entity in the group in the financial sector; then there is no need to create a holding company structure. The corporate can continue to own the bank,” says Mukherjee Even in case of the NOFHC structure, the promoter now has to hold at least 51 per cent of the total paid-up equity capital of the NOFHC, instead of the earlier stipulation of being wholly-owned by the promoter group.

The RBI has also laid down that certain specialised services, such as insurance, mutual funds, stock broking, and infrastructure debt funds, among others that can be conducted through a separate subsidiary. Such activities can be carried out outside the bank through separate financial entities under the NOFHC.

This specific rule, according to some market players, appears to be somewhat less stringent than earlier regulations that clearly did not allow bank and NBFC arms to co-exist.

“In a group, an entity may be allowed to convert into a bank, while the other financial sector entities can operate independently under the NOFHC structure,” adds Mukherjee.