On Wednesday, when news broke that autos-to-telecom giant, Mahindra and Mahindra Ltd, is looking at taking a decent stake in RBL Bank, the latter’s stock price shot up over four per cent, while M&M didn’t react as much. Post-market hours, RBL disclosed that M&M held 3.53 per cent stake in the bank as on July 21 and M&M clarified that it is an investment in the bank, and the stake could increase to 9.99 per cent subject to pricing and regulatory approvals.

On Thursday, the M&M stock plunged over six per cent and RBL Bank by over 2.5 per cent. M&M’s price movement reflects investors’ concern over the group’s over-diversification of capital and RBL’s investors seem upset that a credible name may not be taking a meaty position in the bank.

But is M&M taking a small part of RBL Bank, a big deal? Yes and no.

No, because RBL Bank isn’t so much a damsel in distress.

While life hasn’t been the same for the bank since the Christmas of 2021, its turnaround in the past year cannot be dismissed. The RBL Bank stock was at around Rs 81 a share when R Subramaniakumar took over as its MD & CEO. Now, it has risen to Rs 232 apiece. From a loss of Rs 74 crore in FY22, the bank has posted net profit of Rs 883 crore in FY23. In Q1 FY24, its net profit rose by 43 per cent year-on-year to Rs 288 crore. Asset quality, the shakiest aspect, is on the mend. Gross and net NPA stood at 3.22 per cent and 1 per cent, versus 4.08 per cent and 1.16 per cent a year-ago.

From it’s 2018 peak, the bank may have a long way to go. Yet, if an investor is to look at RBL Bank today, it won’t be for a bail-out.

Perhaps then, M&M which is flush with free cash of over Rs 11,000 crore (consolidated) as on March 31, 2023, truly saw upside potential in the bank and went shopping.

Banking play

But those who’ve seen the fight for bank licenses in 2010–2012, may not want to pass off Wednesday’s development easily, especially if M&M increases its stake over five per cent in the bank.

Back then, smaller banks such as Karur Vysya Bank, the then Catholic Syrian Bank, City Union Bank and even Ratnakar Bank (now RBL) were hunting grounds for large groups such as L&T and Aditya Birla. They held up to five per cent stake in some of these names in anticipation of bank licenses.

In 2012, when the RBI opened application for licenses, they queued up.

Corporates and those with the backing of conglomerates didn’t find luck because RBI stood its ground on the ‘no business houses’ policy. Interestingly, Tatas and Mahindra withdrew their application even prior to the RBI’s decision. But then, Mahindra had a meaty stake in Kotak Mahindra Bank; not any longer.

However, M&M continues to hold over 50 per cent stake its vehicle finance business – M&M Financial Services. In 2016, the central bank opened gates for NBFCs to become banks, organically or inorganically. Ramesh Iyer, M&M Finance’s vice chairman and MD categorically rejected the idea of becoming a bank, because he didn’t see upside in the game.

Interestingly, in an interview to businessline dated August 9, 2022, he said large NBFCs should not ignore the opportunity to become banks. Even at the group level, Anish Shah, managing director, M&M made official his interest in becoming a bank if permitted.

If M&M takes its stake in RBL to 10 per cent, is it a precursor of what is to follow?

Hard regulations

Answer to that will depend on RBI’s stand on the matter. Even in November 2021, it dismissed the idea of allowing corporate houses owning banks. Globally, too, this practice isn’t advocated. Has the industry caught a whiff of the regulator reconsidering its position? Is M&M’s stake any indicator of that? Best not to speculate, because for now, there is nothing to suggest that the central bank has a lighter stand on this subject. In that case, RBL share may just be an investment for M&M.

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