The 26 applicants for new bank licences in India face tough requirements that are likely to lead to only a limited number receiving licences and developing into substantial banks, Fitch Ratings said.
The Reserve Bank of India’s objective to address financial inclusion places heavy demands on profitability and capital, and is likely to lengthen the time it takes for a successful applicant to establish a presence, the ratings agency said in a statement.
The RBI requires new banks to open one in four branches in rural areas and fulfill statutory reserve requirements - including placing 4 per cent of deposits with the central bank and holding 23 per cent in government bonds from day one.
“We believe some entities will find the 40 per cent priority-sector lending targets tough, even though they have around three years to meet them. Infrastructure finance companies with large existing loan portfolios that have little or no prior presence in the required sectors are likely to find the target most challenging,” the agency said.
The strict conditions mean that profitability for new banks is likely to be limited until they secure a strong foothold.
According to the agency, many of the applicants are likely to need to invest in new systems and processes to manage new asset risks. The transformation of existing franchises will be slow, as most will have to start from scratch.
“Asset-finance applicants could leverage their existing customer base, but it is largely unbanked. Successful applicants are likely to be those with financial firepower and strong management to handle the transition and growth,” it said.
The agency believes the established NBFC applicants may be better placed to switch to bank status. Nevertheless, the move away from their core competencies and well-managed operations into new businesses and unfamiliar risks with additional regulatory hurdles, may put pressure on their capital.
New entrants are unlikely to increase competition in the medium term because of the additional profitability pressure from their expansion plans and the financial inclusion conditions.
“The 10-year gap since the last round of new banking licences means that existing operators are well entrenched, especially in urban markets. New entrants may bring some much-needed innovation to a sector where only around 50 per cent of households have access to banking services,” Fitch said.
Kotak Mahindra Bank and YES bank are the among the last two banks which were given licences by the RBI in 2004.
The Reserve Bank of India on July 1 announced that it had received 26 applications--Tata Sons, Aditya Birla Nuvo, Reliance Capital, Bajaj Finserv, L&T Financial Holdings, IFCI and India Post among others--to set up banks.