Indian billionaires including Kumar Mangalam Birla are vying to set up banks in the world’s second-most populated nation after rules were eased to allow companies into the business and tap rural savings.
The Reserve Bank of India sought applications from companies with a 10-year track record and “sound credentials and integrity” to apply for licenses by July 1, according to a statement yesterday. Foreign ownership in the banks, which should have an equity capital of 5 billion rupees ($92 million), will be capped at 49 percent, according to the statement. Companies will have to set up 25 percent of their branches in villages and small towns.
New banks will help Prime Minister Manmohan Singh, who resumed opening up the $1.8 trillion economy in September, to tap savings in rural areas and revive growth from the slowest pace in a decade. Only 35 percent of India’s adult population has accounts with lenders and other financial institutions, according to the World Bank. The global average is 50 percent.
“The only purpose of the banking system is to increase the flow of money into the system,” Shachindra Nath, group chief executive officer at Religare Enterprises Ltd., said in an interview to Bloomberg TV India. “It’s genuine for the government and RBI to expect that newcomers bring that in.”
Religare, controlled by billionaire brothers Malvinder and Shivinder Singh, said it will seek the permit. Birla’s Aditya Birla Group is “eligible and will be applying” for the licenses, said Ajay Srinivasan, chief executive of the group’s financial services business. State-run companies will also be allowed to set up banks, according to the rules.
“With the economy growing, rural India is emerging as the new frontier,” Ajit Mittal, a director at Indiabulls Group, said in a telephone interview. “Setting up branches there will be a good proposition for groups with requisite skill sets.”
Billionaire Anil Ambani’s Reliance Capital Ltd. plans to apply for the permits, Chief Executive Officer Sam Ghosh said. Mahindra & Mahindra Financial Services Ltd., a unit of India’s largest tractor maker, is also keen to set up a bank, said Managing Director Ramesh Iyer.
Still, the licenses are unlikely to be issued until late 2014 or early 2015, said A.S.V. Krishnan, a Mumbai-based analyst at Ambit Capital Pvt.
India has 26 state-run banks, accounting for 76 percent of outstanding loans as of March 31, according to the central bank. The country’s 20 private lenders, led by ICICI Bank Ltd., held 19 percent of the loan market, while 40 foreign banks accounted for the rest.
Banks operating in India collectively have 49.6 trillion rupees in outstanding loans as of Oct. 31, data compiled by the RBI shows. In an Oct. 30 statement, the Reserve Bank projected loan growth of 16 percent and deposit growth of 15 percent for the financial year ending March 31.
Bank loans, excluding advances made to state agencies for food procurement, expanded 16 percent in the year to Jan. 25, according to the RBI.
India’s economy will expand 5 percent in the year ending March 31, the least in a decade, government data shows. Singh in September eased rules for foreign direct investment in retail and airlines. He also raised fuel prices to reduce the government’s subsidy burden.
The RBI established guidelines that would open up the nation’s banking system to more private-sector firms in 1993 amid reforms that included liberalizing interest rates and setting standards for measuring non-performing loans. Based on those guidelines, the central bank granted licenses to 10 lenders, including ICICI, HDFC Bank Ltd. and IndusInd Bank Ltd.
It revised those rules in 2001 and gave permits to Kotak Mahindra Bank Ltd. and Yes Bank Ltd. over the following three years. In August 2010, the RBI said it would issue new guidelines for licensing more banks and began seeking feedback from existing lenders and industry groups.
“The Indian banking industry can do with a little bit more competition,” Uday Kotak, managing director of Kotak Mahindra Bank, said in an interview last month. Regulators need to ensure that “some of the issues faced in other sectors, which have led to a perception of cronyism, do not get repeated when banking licenses are issued.”
Firms will have to set up a wholly owned, non-operative financial holding company and undergo a so-called fit and proper test to win permits. The holding company will own 40 percent of the bank, which will have to be reduced to 15 percent in 12 years, according to the statement. The lender will have to sell shares within three years of starting business.
The holding company will not be allowed to lend to firms owned by the founder. The rules also don’t allow the company to invest in any financial firms owned by the holding company.
New banks will need to maintain a 13 percent capital adequacy ratio for three years, compared with the 10 percent mandated by the regulator when it set guidelines for new lenders in 2001.
“In India, there isn’t a lot of difference in the strategy and business model of banks because these are as per the guidelines of the regulator,” Shinjini Kumar, a director at PricewaterhouseCoopers, said in an interview to Bloomberg TV India. “The only differentiator is the corporate governance and credibility of the entity.”