Tata Sons out of banking race, will other big groups follow?

Tata Sons has withdrawn its application for setting up a bank, saying its current financial services model best supports the needs of the group’s domestic and overseas businesses.

Tata Group said its current financial services business would need to be restructured to meet the requirements of a banking licence, which would impact its operations not only in India but also internationally.

[caption id=“attachment_1246877” align=“alignleft” width=“380”]  Tata Group said its current financial services business would need to be restructured to meet the requirements of a banking licence, which would impact its operations not only in India but also internationally. Reuters[/caption]

The group earns more than 60% of its revenues from overseas, an _Economic Times report p_ointed out.

The withdrawal implies that RBI’s conditions were restrictive and complying with them would have affected the conglomerate’s other businesses.

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" Frustration over the need to obtain approvals from over 1,000 of its group companies and reluctance to rejig global operations to meet the Reserve Bank of India’s eligibility criteria have compelled the Tata Group to withdraw its application for a bank licence," a report in _The__ Times of India_said this morning.

“Given that we have more than 1,000 companies in the group, it was impossible to complete a detailed assessment, seek the requisite approvals from various affected Tata companies prior to filing of our application,” Tata Sons said in a statement.

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Clearly the rigid corporate structure that the Reserve Bank of India had mandated for all financial services companies made it unworkable for the $100-billion group.

“After prolonged deliberations and detailed analysis, Tata Sons has therefore decided to withdraw its application dated July 1, 2013, from the current round of licensing,” the company said in a statement.

“A detailed evaluation of the guidelines and analysis of clarifications were done after filing of application on July 1. It was found that group companies with foreign operations, at times, needed to provide financing solutions to their customers. Since all financing companies in the group needed to be under the non-operative financial holding company (NOFHC), there might have been situations when a particular country was not priority for the proposed bank/NOFHC but extremely important for an operating company,” a Tata Sons spokesperson was quoted as saying in the BS report.

So the biggest stumbling block was over the RBI’s insistence that the promoter group would be permitted to set up a new bank only through a wholly owned NOFHC, which will not only hold the bank but also all other regulated financial services companies within the group.

The spokesperson also said that overseas financing was further complicated as the law in some countries required the operating company to partner a local bank to set up a financing company. Therefore, under the existing guidelines, meeting requirements such as all financial services entities in the group should necessarily be owned by the NOFHC and no group company can have a direct shareholding in these entities will not be possible.

The Tatas are the second to withdraw after Videocon Group dropped out of the race in September

Rules for new bank licences also include a requirement that 25 percent of a new bank’s branches be located in rural areas.

In June, Mahindra & Mahindra Financial Services, part of the Mahindra Group, opted not to apply for a licence, citing liquidity rules and a requirement to convert all its existing finance company branches to full-service bank offices within 18 months while at the same time setting up new rural branches.

About two-dozen licence applications are pending.

Big business houses with licence applications pending include Aditya Birla Nuvo, part of the Aditya Birla conglomerate, Reliance Capital, controlled by billionaire Anil Ambani, and L&T Finance Holdings, part of India’s largest engineering conglomerate, Larsen & Toubro.

RBI has indicated that it will announce the shortlisted applicants by January.

Tata Sons’ decision to withdraw its application comes at a time when the new Reserve Bank of India governor Raghuram Rajan has hinted at significant changes in the banking structure over the coming years.

Since taking over in September, Rajan has repeatedly said that the central bank is exploring the possibility of making licences available on-tap, along with considering differentiated licencing in the banking sector. Secondly, Rajan and the government have also backed the idea of ‘differentiated’ licensing where players could adopt for specific areas of banking and need not meet priority sector norms.

According to CNBC-TV18’s Latha Venkatesh, these are the likely reasons for the group’s withdrawal:

1.Too much supervision by RBI is always a deterrent for big groups:

There could be some resistance in the regulatory oversight that the Reserve Bank of India (RBI) gets or is demanding once a banking licence is given. It has asked and has got supervisory powers over all companies in the group and their vendors and associate companies. The fear being that if there is a Tata Bank, then it could give subsidised loans to a vendor, a supplier to a Tata Motors or buyer of Tata car

2. Attraction of a bank not high enough given the rules put in by RBI.

In the first two or three years, the bank will have to meet cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements. Then there will be pressure on the margins, the return on equity (ROE) will be very unattractive. Then there are also the priority sector obligations whereby 25 percent of the new branches will have to be opened in unbanked areas or in tier III, tier IV, tier V or tier VI areas. All this makes it very difficult for the new entrant, especially when there is competition from people who are already established in the field and who will be able to give money at lower rates.

3. By the time the group starts making money, it is time for promoters to reduce their stake

The other disadvantage would be that by the time the company would start making money, it is time for the promoters to start reducing their stake because from the fifth through the 10th year, the RBI actually wants promoters to start reducing their stake. It wants the stake to be reduced from 40 percent to 25 percent and 20 percent. So, as it becomes attractive the company would not be able to milk it to its advantage.