RBI draft norms take India Inc closer to banking dream

India Inc moved a step closer to realising its ambition of setting up a bank. Captains of corporate houses will soon be closeted with their finance heads to study the Reserve Bank of India's draft guidelines, and whether the eligibility criteria regarding exposure to real-estate and brokerages, among others, would be a dampener.

Mr R. Shankar Raman, Executive VP (Finance), L&T, said “we have to study the guidelines and hold management discussion on promoter holding and other operational intricacies as we have no issues over meeting the capital requirement and corporate governance.” L&T Finance Holdings, which already holds 4.69 per cent in City Union Bank, intends to provide banking services that suit corporate needs. It recently hit the capital market and raised Rs 1,200 crore.

Mr Sushil Agarwal, Whole Time Director & CFO, Aditya Birla Nuvo, said the Group already enjoys a significant presence across several key financial services businesses, making Aditya Birla Financial Services Group a significant non-bank player.

“We look at these guidelines favourably and now look forward to the opportunity to enter the banking sector, subject to final guidelines,” he added.

Though the RBI had issued the draft guidelines, it is yet to decide on the number of new licences to be issued.

Mr Uday Phadke, President (Finance, Legal and Financial Services Sector), Mahindra & Mahindra, said the Group will be keen to explore a banking licence as the experience of two decades in the financial services domain will provide the necessary understanding and strength.

“The draft guidelines contain a strong focus on greater financial inclusion, efficient corporate governance, adequate controls on exposure to group companies, and time-bound milestones for listing. We now look forward to the release of the final guidelines over the next few months,” said Sam Ghosh, CEO, Reliance Capital.

Eligibility hurdles?

Corporate houses that have evinced interest in the banking space include Anil Dhirubhai Ambani Group, Bajaj Group, Life Insurance Corporation, Indiabulls Financial Services, Religare Enterprises and the Ajay Piramal Group.

Oil and gas major Reliance Industries had formed a joint-venture with DE Shaw, a $20-billion hedge fund founded by the American mathematician David Shaw, to build a financial services business including energy trading, private equity, mutual fund, financial service distribution, infrastructure funding besides equity and debt funding for corporate sector. However, it is not clear whether Reliance would enter banking as a natural extension of its financial services.

The Ajay Piramal Group, at present, flush with funds from the sale of its domestic formulations business, has, in the past, stated its interest to apply for a banking licence. But clarity will come when the final guidelines are issued, since the Group has presence in real-estate.

With these big corporates already providing most of the banking services through their NBFC subsidiary it may be easier for them to switch gear operationally, but meeting the shareholding norms and other restrictions on holding companies exposure may be a stumbling block, said a banking analyst.

The RBI draft guidelines said there is in an inherent risk in the real-estate and broking activities in capital market while the business model and culture are quite misaligned with a banking system.

Post-crisis, there were concerted moves even internationally to separate banking from proprietary trading. More importantly, in India, past experience with brokers on the boards of banks has not been satisfactory. It will, therefore, be necessary to ensure that any entity undertaking such activities on a significant scale is not considered for a bank licence, it added.

“Accordingly, entities and groups that have over 10 per cent income or assets from real-estate construction and broking activities taken together in the last three years, shall not be eligible to promote banks,” it said.

Mr Rukshad Davar, Corporate Partner (Mergers and Acquisition), Majmudar & Co, an international law firm, said the RBI guidelines have thrown in enough protective measures by narrowing the eligibility criteria to corporate groups with more than 10 per cent exposure to real-estate and brokerages.

As a result, only companies with good-track record will be allowed to set up banks, he said, adding that stringent guidelines are good given the prevailing scam-struck environment.