Bank licences: If some of these guys can run a bank, so can I
Given the high hurdles set by the RBI for issuing banking licences, one wonders why there are so many hopefuls. Maybe, owning a bank looks good on the CV.
When George Mallory was trying to raise money from New Yorkers for an expedition to conquer Mount Everest in the mid-1920s, he was asked why anyone would want to climb the highest mountain. His answer: "Because it's there."
If you were to ask many of the 26 hopefuls who have queued up at the Reserve Bank's window for private banking licences, their answer could be similar: "Because, it may be available."
Given half a chance, it seems, Indian promoters will take any opportunity they get to start a new business whether they have the capability or financial muscle for it.
On Monday, the Reserve Bank (RBI) put out a list of those seeking licences and the list is an eye-opener. If you leave out a few obvious big businesses with the right pedigree to consider creating a bank - the Tatas, Birlas, L&T Finance, and IDFC, among them - the list includes many businesses for whom it makes little sense to think of banking as a core competence.
Why should broking houses like JM Financial or a Tourism Finance Corporation or an infra company like SREI Infra want to start a bank? Why should India Post, which runs a fairly inefficient postal service and a shoddy postal savings scheme, think it can run a bank? The RBI has been busy trying to circumscribe gold loan companies from expanding their operations, but that hasn't stopped Muthoot Finance from throwing its hat into the ring.
Maybe, just maybe, the Muthoots of the world want to become banks merely because the RBI is not so nice to gold loan companies.
This is not about prejudging the capabilities of any of these hopefuls in setting up a successful bank, but about asking why. Why do so many people want to run a bank?
Consider the hurdles they have to cross: first, they have to plonk Rs 500 crore on the table as capital on Day One. Then, 25 percent of their branches have to be in "unbanked" rural areas. The RBI's definition of unbanked areas is villages with a population below 10,000. Assuming this means 2,000 households, it means putting up a branch for fewer than 2,000 live accounts. A quarter of the branches will lose money from Day One.
In the current regulatory environment, roughly 27 percent of your deposits have to be locked up in low-yield government bonds (23 percent) and no-interest cash reserve ratio (4 percent). After pre-empting 27 percent, the rest has to be lent out to make a profit, but 40 percent of the credit has to go to "priority" areas, including agriculture, exports, loans to risky small units, etc.
Why would anyone except the strongest financial groups want to do this?
The prime reason why HDFC - the housing finance pioneer - does not want to merge with its bank is regulatory pre-emption. HDFC Managing Director Keki Mistry tells Tamal Bandyopadhyay in his book, Bank for the Buck: "If we were to merge with the bank, we would need a huge reserve requirement. That's the biggest issue....If the regulator excuses us from these pre-emptions for five years or allows us to maintain SLR and CRR on incremental deposits and not on the existing balance-sheet, it would make tremendous sense for both HDFC and the bank."
Once again, it's worth asking: why are unknown companies rushing where HDFC, which has lots of cash in the vault, fears to tread?
And let's not forget, some of the best-known and solvent names in non-banking financial services - like Sundaram Finance - are not getting into banking. Nor is the biggest Ambani, Mukesh Ambani. The Reliance Group that has sought a banking licence is Anil Ambani's Reliance Capital. The man with oodles of cash, brother Mukesh, is waiting and watching. Maybe he will do it the next time, but he is clearly in no hurry.
On the other hand, look at the names at the starting post. Do companies such as Bandhan Financial Services (microfinance), INMACS Management Services (an MIS developer, among other things), UAE Exchange (a foreign exchange remitter) and Suryamani Financing Co Pvt Ltd (Kolkata-based finance company) remotely look like someone one would associate with banking?
Or why would a Life Insurance Corporation of India want to start a new bank, when it is already a substantial equity holder in three banks - Oriental Bank of Commerce, Corporation Bank, and UTI Bank.
Yet, they are all there in the RBI's list of 26 hopefuls.
The chances are that not more than four or five of the 26 will get a look-in in the first list of new bankers.
As we noted before, even if you are not deterred by the regulatory hurdles, the RBI plans to erect some more of them in picking its licence recipients. One is it's omnibus "fit and proper criteria", which demands that promoters must have sound credentials and integrity (sounds good, but isn't that a given?); then they should have had a 'successful' track record of 10 years (what is "successful for the RBI?); and they must have a good rating from the other regulators (if you have crossed Sebi's or Irda's path unfavourably, watch out).
As we wrote in March, "The biggest wet blanket is the condition that the "promoter/promoter groups' business model and business culture should not be misaligned with the banking model and their business should not potentially put the bank and the banking system at risk on account of group activities such as those which are speculative in nature or subject to high asset price volatility." (Italics ours)"
The RBI also warned that even if a promoter meets all its criteria, he may still not be allowed near the starting post. "Banking being a highly leveraged business, licences shall be issued on a very selective basis to those who conform to the above requirements, who have an impeccable track record and who are likely to conform to the best international and domestic standards of customer service and efficiency. Therefore, it may not be possible for RBI to issue licences to all the applicants meeting the eligibility criteria prescribed above. (Italics ours)".
Back to the question: why then are so many promoters willing to try their luck?
This writer believes that it is merely the respectability of the banking business that makes it so attractive. Some entrepreneurs want to run an airline even if it burns a hole in their pockets; others think owning a bank is like a licence to print money and looks good on your business card.
The other reason is the push effect: when the RBI looks at non-bank financial companies with varying degrees of suspicion, some of them might feel that they will be able to do better as banks.
There is no other reason why brokers, realtors, postal service providers and sundry promoters with some kind of finance businesses in their repertoire would want a banking licence.
It may be as simple as that.
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