Pandit to Nippon Life Buy Into India’s Banking Aspirants

Firms from Sumitomo Mitsui Trust Holdings Inc. to Nippon Life Insurance Co. are buying stakes in 26 Indian companies seeking bank licenses to tap credit growth in Asia’s third-biggest economy.

Tata Sons Ltd., which manages India’s biggest business group, along with companies controlled by billionaires Anil Ambani and Kumar Mangalam Birla are among aspirants as the deadline ended today for applications, an e-mailed statement from India’s central bank showed. Nippon Life and Sumitomo Mitsui will invest in a bank being set up by Ambani’s Reliance Capital Ltd. Former Citigroup Inc. Chief Executive Officer Vikram Pandit is buying a stake in JM Financial Ltd.

Foreign companies are chasing higher returns by investing in new lenders in the South Asian nation, where the World Bank estimates only 35 percent of the population has bank accounts and after the regulator invited new bids for the first time in more than a decade. Wide gaps between interest rates on deposits and loans will drive up profits for new banks in India, said Saurabh Mukherjea, chief executive officer for institutional equities at Mumbai-based Ambit Capital Pvt Ltd.

“It’s as close as you can get to a license to print money in a democracy,” Mukherjea said in a telephone interview. “A bank can get deposits by paying about a 5 percent interest rate on a savings account and lend it to businesses for as high as 15 percent, making India an immensely attractive geography.”

Spurring Credit

Prime Minister Manmohan Singh’s government is giving banking permits to tap savings in rural areas and spur credit flow to help revive economic growth from the slowest pace in a decade. Successful applicants will have to fulfill a number of requirements set by the central bank.

New lenders will have to set up one branch in every four in villages with fewer than 10,000 people, the Reserve Bank of India has said. They will need to establish a wholly owned, non-operative financial holding company and undergo a so-called fit and proper test. Banks will have 18 months to be set up.

Pandit and long-time associate Hari Aiyar will jointly own a 3 percent equity stake in JM Financial through an issuance of warrants, the Mumbai-based investment firm said on May 16.

“I continue to believe in the long-term growth prospects of India,” the former Citigroup CEO said in an e-mailed statement when the deal was announced. Pandit’s first public investment since Citigroup directors ousted him in October involves him taking a leadership role in the proposed bank.

Ownership Cap

Nippon Life, Japan’s biggest life insurer, and Sumitomo Mitsui Trust, the country’s fourth-biggest lender, will each buy as much as 5 percent of Reliance Capital’s planned bank, Ambani’s financial services firm said in a statement on June 26, without specifying the sum invested.

Foreign ownership in the banks, which should have an equity capital of at least 5 billion rupees ($84 million), will be capped at 49 percent, according to the statement.

Sumitomo Mitsui Trust is relying on “strong infrastructure demand and an emerging middle class” to generate profits, the Japanese bank said the same day.

Rural banking in India could be worth $24 billion in assets by 2015 according to McKinsey & Co. Of the 600,000 habitations, only about 36,000 have access to a local commercial bank branch, according to central bank estimates.

“India is hugely underbanked,” Birla said in Kolkata on June 28 . “We need much more credit creation to grow at 8 percent per year.”

Banking Aspirants

Religare Enterprises Ltd., backed by billionaire brothers Malvinder and Shivinder Singh, Bajaj Finserv Ltd., Edelweiss Financial Services Ltd., Aditya Birla Nuvo Ltd. and IDFC Ltd. are among other companies seeking to set up banks.

Aditya Birla Nuvo applied for a permit on June 28, it said in an exchange filing today, adding that one of its wholly-owned subsidiaries, Aditya Birla Finance Ltd., will be converted into a lender. L&T Finance Holdings Ltd. said its board over the weekend approved its bid for a license.

Other potential applicants were dissuaded by the stringency of the central bank’s rules, which also include higher capital standards, restrictions on activities of holding companies, and an obligation to sell shares within three years of starting business.

Mahindra and Mahindra Financial Services Ltd., the financing unit of India’s biggest sports utility vehicle maker, and Piramal Enterprises Ltd. are among companies that decided against seeking permits.

Not Attractive

“Rules and regulations for banking licenses have not made it as attractive as we had thought earlier,” said billionaire Ajay Piramal, in an interview with Bloomberg TV India on June 27. The time to convert financial firms into banks “isn’t enough and rules on financial inclusion could have been more liberal.”

Under the RBI’s requirements, the holding company will first own 40 percent of the bank and then cut it to 15 percent in 12 years. The holding company won’t be allowed to lend to businesses owned by the founder. The bank will be unable to invest in 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.

The RBI is tightening prudential norms for the new banks as bad loans rose to 3.4 percent of total loans as of March 31 from 2.9 percent a year earlier. The measure may rise to 3.8 percent by the end of September, it said in a report on June 27.

‘Uphill Task’

Return on equity, a gauge of profitability, for Indian banks fell to 12.8 percent in 12 months to March 31 from 13.4 percent, data compiled by RBI shows. Shares of State Bank of India, the nation’s biggest by assets, have slumped 16 percent this year, compared with a 0.8 percent gain in the benchmark S&P BSE Sensex index.

The $40 billion Aditya Birla Group, which controls the world’s biggest supplier of aluminum to carmakers and runs India’s largest cement maker, is working on setting up the bank within six months of receiving the permit. Making profits from the venture may take as long as ten years, said Rakesh Jain, managing director of Aditya Birla Nuvo.

“It is an uphill task,” said Jain in an interview on June 27. “We hope the gestation period is closer to five years but we will know the details of the landscape once we get onto it.”