Feb. 25 (Bloomberg) -- Religare Enterprises Ltd., backed by billionaire brothers Malvinder and Shivinder Singh, led the advance in shares of companies eligible to apply for banking licenses for the first time in a decade.
Religare surged 7.4 percent to 291.8 rupees in Mumbai, the most since July 2. L&T Finance Holdings Ltd. advanced 5 percent to 85.7 rupees. Srei Infrastructure Finance Ltd. jumped 4 percent to 37.4 rupees. The S&P BSE BANKEX index of 14 banks stocks fell 0.3 percent.
India’s central bank sought applications from companies in the world’s second-most populous nation seeking to boost credit growth in rural areas and revive an economy expanding at the slowest pace in a decade. Only 35 percent of India’s adult population have accounts with lenders and other financial institutions, according to the World Bank, compared with the global average of 50 percent.
The companies most likely to get banking permits are gaining, said Vishal Narnolia, Mumbai-based banking analyst at SMC Global Securities Ltd. “While there could be 10 or more applicants the central bank is likely to give out less than four permits this time.”
Reserve Bank of India released rules for new permits on Feb. 22. Companies with a 10-year track record and “sound credentials” can apply by July 1, the central bank said in a statement. Foreign ownership will be capped at 49 percent for the first five years, and the lenders are required to set up one-in-four of their branches in villages with less than 10,000 people, according to the statement.
Mahindra & Mahindra Finance Ltd., the financing unit of India’s biggest SUV maker, had 639 branches across India as of Dec. 31 with 233 billion rupees ($4.31 billion) of loans outstanding, according to an exchange filings. About 20 percent of its total loans was for tractor purchases, while about 25 percent was used to finance cars. The shares gained 0.5 percent.
Billionaire Kumar Mangalam Birla’s Aditya Birla Nuvo Ltd. added 1.63 percent to 1,084.25 rupees, while billionaire Anil Ambani’s Reliance Capital Ltd. dropped 0.1 percent to 407.1 rupees.
“The rally in non-bank lender stocks is a one-time spurt not necessarily warranted by fundamentals,” said A.S.V Krishnan, Mumbai-based banking analyst at Ambit Capital Pvt. “It will be a long grind before any new bank can make money according to the new banking rules. The froth will settle.”
Srei Infrastructure Finance also plans to apply for a banking permit, Chairman and Managing Director Hemant Kanoria said in an interview. Setting up lending operations would help Srei “substantially” because of its rural operations, he said.
“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.”
State-run companies will also be allowed to set up banks, according to the rules. Still, the licenses are unlikely to be issued until late 2014 or early 2015, said Ambit’s Krishnan.
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 bank credit, while 40 foreign banks accounted for the rest.
Banks operating in India collectively have 49.6 trillion rupees ($915 billion) 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 lenders will have to sell shares within three years of starting operations.
The holding companies won’t be allowed to lend to firms owned by their founders under the new rules, which also don’t permit the banks to invest in any financial firms owned by their parent.
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.”
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