Reserve Bank Deputy Governor K C Chakrabarty on Tuesday clarified that the RBI is open to let realty and brokerages run banks if they meet the "fit and proper criteria" as detailed in the final guidelines.
Speaking on the sidelines of an investors’ conference in Mumbai, Chakrabarty said realtors and brokerages carry out legitimate business. "If they can demonstrate that they satisfy all the requirements, all the concerns...how can you deny them... definitely, if this is not in the guidelines, then it is open," Chakrabarty said.
The final guidelines by the Reserve Bank made a climbdown from the initial stance, which in the draft norms issued in August 2011, had virtually barred Realtors and Brokerages from its eligibility criteria.
RBI's criteria for new bank licence applicants require them to be financially sound with a successful track record of 10 years. As per the new norms, entities with a minimum track record of 10 years would be eligible for licence after clearance from sector regulators, enforcement, investigative agencies such as IT Department, CBI and ED.
Given the fact that most realtors are reeling under high debt, poor cash flows, low market valuations and are embroiled in some legal tangle, meeting the criteria would be difficult.
Secondly, the applicants’ business model should not put the bank and the banking system at risk due to group activities, which are speculative in nature or subject to high asset price volatility. Real estate, however, is the biggest speculative market with more than 70 percent home owners comprising of investors rather than end users. What's worse is that it is the builders who have the market so speculative by holding on to inventory and artificially raising home prices.
According to a report in Business Standard, brokerage firms Religare, IIFL and Edelweiss are said to be interested to venture into banking. However, given that they deal with stock markets, their business model is highly speculative.
Clearly, even though the RBI has not barred them directly, it surely wants to ring-fence the new entities from risks that the group may face and also protect the depositors’ money from being diverted to risky ventures.
Hence the pool of eligible applicants may be limited in the end as the RBI is cautious in giving out new licenses. "We do not expect the RBI to issue more than five licences. We believe the probability of a public sector entity obtaining a banking licence is low," Standard Chartered said in a report.
Bank of America Merrill Lynch is also of the view that RBI may initially give out 4-5 new bank licences even as restrictions on real estate or brokerage business have been removed in the final guidelines.
"We do think the new set of banks (post RBI licences) will find it more difficult to grab market shares in the same manner as the current private banks are aggressive and also employ the best technology," Bank of America Merrill Lynch said.
In fact, when asked about the number of licences that may be issued, the senior most deputy governor again gave an ambiguous response and said the number of new banks will depend on the eligible candidates and it is too premature to give a specific count now.
"First, let's see how many people are eligible, how many are fit and proper. If no body is fit and proper, then what is the use of giving licences? This is all too premature...(to talk about the number of licences to be issued)," Chakrabarty said.
He also said the fit and proper guidelines are any regulator's master stroke. "It is any regulator's master stroke, why only RBI. And that is why fit and proper guidelines have been evolved...," he said.
Last Friday, the central bank released the final guidelines for new banking licences which said an applicant should be "fit and proper" for getting a licence and have a 10-year impeccable track record. It has allowed business houses, state-run enterprises and non-banking finance companies to apply for licences to set up banks.
Chakrabarty also said the new banks will have to find businesses in rural areas and SME space, among others, as the priority sector lending norms will be the same for them like others. On consolidation in the banking sector, Chakrabarty said the RBI may come up with a paper addressing the concerns.
"If we are talking of new banking licences, then don't talk of consolidation. These are two contradictory things.... consolidation is a defined issue... some paper will come out that may be addressing some of these issues," he said.
With PTI inputs