New Banking Licenses - Why Are Applicants Opting Out?

The issuance of new banking licenses by the RBI after almost 10 years recently made it to the headlines. What added some zest to this was the RBI’s policy of issuing licenses to Non-Banking Finance Companies (NBFCs) and even to corporate entities. No wonder there were many contenders for the same, with as many as 26 companies applying for the banking license.

However, the story now seems to be taking a different turn as few of the larger names are abstaining from the race. Mahindra & Mahindra Financial Services (MMFSL) was the first to have opted out of the race even before the application was being filed, and now, another trusted name, viz. Tata Sons, has followed suit.

Though Tata Sons’ reasons for opting out are not in the public domain so far, reports suggest that it is the stringent norms that have led them to doing so. Let’s take a look at a few of the norms that could have pushed these leading contenders over the brink.

What appears to be the primary factor is the higher capital requirement in the form of SLR and CRR, that too in the initial 2-3 years. This would result in little room for margins and return on equity. MMFSL has opted out on these very grounds, as it felt that the capital will get stuck. The company clearly stated that it would generate higher returns if it invests this capital in its NBFC business.

Another issue was lending to the priority sector. This regulation mandated that 40% of the advances go to sectors like agriculture, small business, retail traders, self-employed individuals, etc. Many of the applicants feel that it would result in a poor balance sheet as the companies are obliged to lend to the priority sector from the day of getting licenses.

In addition, the opening up of 25% branches in unbanked areas (specifically rural) is not seen as a lucrative proposition. The simple reason for this is that it would require a higher branding effort and competition with PSU banks.

Last but not the least, the norm of compulsory listing in the first three years would be difficult for many applicants to meet.

While these rules are making life difficult for the applicants, we feel asking RBI to change any rules would not be right either. The RBI is issuing licenses for inclusive growth of rural areas and for not the benefits of corporate houses. The rules were set much ahead of when the applications were actually made. So, it is completely the applicants' prerogative whether to stay in the game or leave it.

Thus, we do not expect to see any changes in regulations from the RBI. Hence, we will not be surprised to see other marquee names also stepping aside.