Banking licence: Vikram Pandit's India play will not be easy

Even though the JM Financial stock made merry following the announcement of former Citigroup CEO Vikram Pandit’s being roped in to head the banking foray at the financial services firm, obtaining a licence with his name alone will not be easy due to several entry barriers and tough compliance norms set by the Reserve Bank of India.

The JM Financial stock has rallied 43 percent in the last week with investors in favour of a global Indian banker joining a small Indian banker. However, the momentum in all probability will be shortlived as markets tend to play up an event in advance though the procedure of granting licences is a long-drawn out one.

Following money laundering allegations by digital magazine Corbapost, the Reserve Bank of India has proposed to the finance ministry a review of all bank licences on the fit-and proper-criteria, especially in matters that relate to inter-connectedness among entities forming a banking conglomerate, there by bringing insurance, mutual funds and brokerages under its ambit, t he Business Standard reported today.

The Corbapost sting had alleged that several banks, both private and public, had offered to launder black money by investing in insurance schemes. “It is rather endemic overarching the entire banking system and insurance sector, without exception, however shocking it might be. The scale is vast and unfathomable,” the portal added.

In its report , the central bank said it will assess promoters/ management of new licence applicants as well as the promoters/management within existing banks.

Tightening its grip on the banking sector, the central bank has said that the review needs to ensure that an arm’s length is maintained from various operations to avoid systemic risk. It has also suggested taking up the issue at FSDC or its sub-panel to approach it in a holistic manner, after getting feedback from other regulatory agencies, the report said. ( Read the entire report).

A report in the Financial Express said that the government has not yet received a single banking application as many are finding it tough to comply with condition of opening 25 percent of branches in unbanked centres in rural India to help financial inclusion. Moreover, at least 40% of their loan portfolio has to be in priority sector, or small loans, as soon as they start operations.

“Any fine for failing to meet these targets would hit their bottom line during the starting period,” the report said, quoting consultants working on some bank applications.

And weaving in these very nuances of financial inclusion will be a key challenge for Pandit too. While Pandit’s substantial banking knowledge is a positive, his experience is limited to working in a multinational. Hence, while his credentials and brand factor will certainly earn the financial services firm brownie points, it is likely to face a stiff challenge from contenders it is pitted against. Moreover, Pandit won’t be involved in the daily workings of JM Financial’s proposed bank and will continue to be based in New York, Vishal Kampani, managing director of JM Financial’s institutional equities business, was quoted as saying by _The Wall Street Journa_l .

It remains to be seen how Pandit, who is credited with steering Citi out of its darkest days, plans on making lives better for millions of Indians through financial inclusion without actually getting his hands dirty.

As this Economic Times article rightly says, Pandit’s India decision is like Michael Schumacher deciding to race on the roads of Mumbai.

“The man who worked all along under regulators who hardly regulated and liberal in their approach to the demands of the market, will face a regulator in India which picks holes in lending to farmers and deviations from guidelines in sale of derivatives.”

Most major corporate houses, such as the Tatas, Birlas and Reliance Industries, besides non-banking financial companies like L&T Finance, M&M Financial Services and the Shriram group, are said to be interested in setting up new banks. Brokerages such as India Infoline, Edelweiss Financial Services, microfinance institutions such as Bandhan Financial Services Pvt. Ltd and Janalakshmi Financial Services etc too are keen on obtaining a banking licence.

RBI had in its its draft guidelines, barred companies with exposure to the capital markets and real estate from applying for a banking licence. But after a face off with the finance ministry, it removed the clause, but is still not too optimistic on broking firms applying for licences.