Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Positive for groups without existing financial
businesses, less so for those with existing NBFCs
Groups that derive 10% or more of income or assets from broking or real estate cannot
promote banks. India Bulls cannot, Reliance Capital can.
Only entities / groups in the private sector that are owned and controlled by residents
shall be eligible to promote banks. So, government-owned PFC/REC/ IFCI do not
qualify.
The RBI has laid down that promoters will be permitted to set up a new bank only
through a wholly-owned Non-Operative Holding Company (NOHC), which will hold the
bank as well as all the other financial services companies regulated by the RBI or other
financial sector regulators.
If a promoter group already has an existing NBFC in a group which is involved in an
activity that banks can undertake, the activities undertaken by the NBFC will have to be
transferred to the new bank, or the NBFC will have to convert itself into a bank.
Positive for: Reliance Industries/Tata Group/ Aditya Birla Group and Reliance Capital.
Less positive for existing NBFCs – M&M Finance and Shriram as their asset financing
businesses will need to merge with the bank. What happens to the HDFC group
structure is important to watch out for.
New banking guidelines: Summary
The new banking draft guidelines have opened new banking licenses to all corporates other than
those with substantial interest in broking and real estate. Three most important points: 1) Groups
that derive 10% or more of income or assets from broking or real estate cannot promote banks.
India Bulls does not qualify but Reliance Capital does. 2) Only entities / groups in the private
sector that are owned and controlled by residents shall be eligible to promote banks. This means
that PFC/REC/IFCI, being government owned, do not qualify as of now. 3) To ring fence the
banking business and ensure that it is not misused by corporate promoters, the RBI has laid
down that the promoters will be permitted to set up a new bank only through a wholly-owned
Non-Operative Holding Company (NOHC) which will hold the bank as well as all the other
financial services companies regulated by RBI or other financial sector regulators.
Only non-financial services companies / entities and individuals belonging to the promoter group
will be allowed to hold shares in the NOHC. Financial services companies belonging to the
promoter group would be held by the NOHC and would not have shareholding in it. If a promoter
group already has an existing NBFC in a group which is involved in an activity that banks can
undertake, the activities undertaken by the NBFC which banks are allowed to undertake
departmentally, will have to be transferred to the new bank, or the NBFC will have to convert itself
into a bank, if all the activities undertaken by it are allowed to be undertaken by a bank
departmentally.
NBFCs namely M&M Finance, Shriram and LIC housing had earlier indicated that they would like
to retain their current NBFC operations and also float a bank. That option is no longer valid. The
guidelines are tough for most existing corporate groups that have large NBFCs – M&M, Shriram
Group. But they are positive for large industrial houses that do not have meaningful financial
services businesses like Reliance Industries, Tata group or for those groups that have financial
services that banks are not allowed to undertake mainly Aditya Birla Nouvo and also Reliance
Capital.
Why groups with existing NBFCs have to bring down their return
expectations?
Take M&M Finance, for example. M&M owns 65% of M&M Finance. Now M&M will have to
transfer this to a bank, which will be held by M&M through an NOHC. The NOHC will have to
bring down its stake in the bank to 40% within two years, 20% within 10 years and 15% within 12
years. Also, currently M&M Finance earns an RoA of 4.5% and RoE of 24%. The best private
bank earns an RoA of 1.6% and RoE of <20%. So promoters who already own financial
businesses will have to bring down their expectations of returns from financial and banking
businesses.
Key guidelines
Only private entities can float banks: Only entities/groups in the private sector that are owned
and controlled by residents shall be eligible to promote banks. So, as of now REC, PFC, IFCI do
not qualify as bank promoters. Even LIC Housing is doubtful as its promoter is state owned.
Entities with substantial stock broking and real estate construction activities cannot float
new banks: Entities/groups that have significant (10% or more) income or assets or both from/in
such activities, including real estate construction and broking activities taken together in the last
three years, shall not be eligible to promote banks. All the large NBFCs meet this rule and
therefore qualify for banking licenses. Reliance Capital, too, meets the norm because while its
capital markets business is large its broking business is small. IndiaBulls does not qualify
because of its real estate activities.
Applicants will be required to list group companies undertaking key business activities.
Structure – NOHC structure mandatory
Promoter/promoter groups will be permitted to set up a new bank only through a wholly-owned
Non-Operative Holding Company (NOHC), which will hold the bank as well as all the other
financial services companies regulated by the RBI or other financial sector regulators. The
objective is that the Holding Company should ring fence the regulated financial services
activities of the group including the new bank from other activities of the group, i.e.,
commercial, industrial and financial activities not regulated by financial sector regulators. Thus,
only non-financial services companies/entities and individuals belonging to the promoter group
will be allowed to hold shares in the NOHC. Financial services companies belonging to the
promoter group would be held by the NOHC and would not have shareholding in it.
The NOHC will be registered as a non-banking finance company (NBFC) with the Reserve
Bank and will be governed by a separate set of prudential guidelines.
The NOHC will not be permitted to borrow funds for investing in companies held by it. It will
just be a vehicle to hold the investments in all regulated financial sector entities on behalf of
the promoter/promoter group for regulatory and prudential comfort.
The initial minimum paid-up capital for a new bank shall be Rs5bn. The actual capital to be
brought in will depend on the business plan of the promoters.
Shareholding of NOHC in a bank
The NOHC shall hold a minimum of 40% of the paid-up capital of the bank, which shall be
locked in for a period of five years from the date of licensing of the bank.
Shareholding by the NOHC in the bank in excess of 40% of the total paid-up capital shall be
brought down to 40% within two years from the date of licensing of the bank.
In the event of the bank raising further capital during the first five years from the date of
licensing, the NOHC should continue to hold 40% of the enhanced capital of the bank for a
period of five years from the date of licensing of the bank. Capital, other than the holding by
NOHC, could be raised through public issue or private placements.
The shareholding by the NOHC shall be brought down to 20% of the paid up capital of the
bank within a period of 10 years and to 15% within 12 years from the date of licensing of the
bank and retained at that level thereafter.
The aggregate non-resident shareholding from FDI, NRIs and FIIs in the new private sector
banks shall not exceed 49% for the first 5 years from the date of licensing of the bank. No
non-resident shareholder, directly or indirectly, individually or in groups, will be permitted to
hold 5% or more of the paid up capital of the bank. After the expiry of 5 years from the date of
licensing of the bank, the foreign shareholding would be as per the extant policy.
Groups that have existing NBFCs need to convert to a bank: The promoter/promoter group
with an existing NBFC, if considered eligible for a bank license, will have two options: (a) Promote
a new bank, if some or all the activities undertaken by it are not permitted to be undertaken by
banks departmentally. In such cases, the activities undertaken by the NBFC which banks are
allowed to undertake departmentally, will have to be transferred to the new bank, or (b) Convert
itself into a bank, if all the activities undertaken by it are allowed to be undertaken by a bank
departmentally.
Additional considerations in respect of promoter groups having 40% or more
assets/income from non financial business
In respect of promoter groups having 40% or more assets/income from non financial business,
the following additional requirements will be applicable:
The board of the bank should have a majority of independent Directors.
The exposure of the bank to any entity in the promoter group, their business associates, major
suppliers and customers shall not exceed 10% and aggregate exposure to such entities shall
not exceed 20% of the paid up capital and reserves of the bank, subject to compliance with
the provisions of Section 20 of the Banking Regulation Act, 1949. All exposures will have to be
approved by the board and all credit facilities to these entities should have a minimum tangible
security cover of 150%.
The bank will have to file a return, certified by statutory auditors, on quarterly basis of all
exposures including credit facilities extended to the entities in the promoter group, their
business associates, and major suppliers and customers for amounts in excess of Rs10m.
Banks would be required to seek prior approval of the RBI for raising paid-up capital beyond
Rs10bn for every block of Rs5bn. While examining such proposals, the RBI shall primarily
look into whether the bank has indulged in connected lending and self dealing, whether the
corporate governance standards are adequate, whether information from promoter group has
been forthcoming to facilitate consolidated supervision and whether the board members
remain ‘Fit and Proper’.
If the RBI is not satisfied about compliance with the above provisions, it would take severe
deterrent action as per law and licensing conditions.
Rationale for new banking licenses
While existing banks complain of excess competition, here’s the government’s rationale for
persuading the RBI to issue new licenses:
Despite the existence of over 100 commercial banks with huge branch networks only over
20% of the population has bank accounts.
New banks are required to take the RBI financial inclusion principles one step ahead.
A lot of corporates that do not currently own banks find returns in the financial industry
attractive and are keen to set up banks not to finance group activities but to be in a new
business with high returns.
Timeline
We believe the RBI will take another 3-6 months to finalize these guidelines. Some clauses will
be left ambiguous so that the central bank retains the choice of denying licenses to some who
qualify on paper but not in principle.
Longer term thoughts: Will HDFC need to merge with HDFC Bank?
The RBI has recommended NOHC for new banks in which all businesses that a bank can legally
undertake must be carried out by the bank only, not by a separate NBFC. What happens to
existing groups especially HDFC? Will they have to follow the same structure? Will that mean a
merger of HDFC and HDFC Bank? The RBI will eventually clarify on what structure existing
players need to adopt.
M&A – Positive for old private banks, negative for very new banks
With a few large groups are likely to enter banking, the space is likely to get competitive. This is
positive for old private banks that already fulfil most priority lending targets as they will be likely
takeover candidates. It is negative for the very new private banks like Yes Bank.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Positive for groups without existing financial
businesses, less so for those with existing NBFCs
Groups that derive 10% or more of income or assets from broking or real estate cannot
promote banks. India Bulls cannot, Reliance Capital can.
Only entities / groups in the private sector that are owned and controlled by residents
shall be eligible to promote banks. So, government-owned PFC/REC/ IFCI do not
qualify.
The RBI has laid down that promoters will be permitted to set up a new bank only
through a wholly-owned Non-Operative Holding Company (NOHC), which will hold the
bank as well as all the other financial services companies regulated by the RBI or other
financial sector regulators.
If a promoter group already has an existing NBFC in a group which is involved in an
activity that banks can undertake, the activities undertaken by the NBFC will have to be
transferred to the new bank, or the NBFC will have to convert itself into a bank.
Positive for: Reliance Industries/Tata Group/ Aditya Birla Group and Reliance Capital.
Less positive for existing NBFCs – M&M Finance and Shriram as their asset financing
businesses will need to merge with the bank. What happens to the HDFC group
structure is important to watch out for.
New banking guidelines: Summary
The new banking draft guidelines have opened new banking licenses to all corporates other than
those with substantial interest in broking and real estate. Three most important points: 1) Groups
that derive 10% or more of income or assets from broking or real estate cannot promote banks.
India Bulls does not qualify but Reliance Capital does. 2) Only entities / groups in the private
sector that are owned and controlled by residents shall be eligible to promote banks. This means
that PFC/REC/IFCI, being government owned, do not qualify as of now. 3) To ring fence the
banking business and ensure that it is not misused by corporate promoters, the RBI has laid
down that the promoters will be permitted to set up a new bank only through a wholly-owned
Non-Operative Holding Company (NOHC) which will hold the bank as well as all the other
financial services companies regulated by RBI or other financial sector regulators.
Only non-financial services companies / entities and individuals belonging to the promoter group
will be allowed to hold shares in the NOHC. Financial services companies belonging to the
promoter group would be held by the NOHC and would not have shareholding in it. If a promoter
group already has an existing NBFC in a group which is involved in an activity that banks can
undertake, the activities undertaken by the NBFC which banks are allowed to undertake
departmentally, will have to be transferred to the new bank, or the NBFC will have to convert itself
into a bank, if all the activities undertaken by it are allowed to be undertaken by a bank
departmentally.
NBFCs namely M&M Finance, Shriram and LIC housing had earlier indicated that they would like
to retain their current NBFC operations and also float a bank. That option is no longer valid. The
guidelines are tough for most existing corporate groups that have large NBFCs – M&M, Shriram
Group. But they are positive for large industrial houses that do not have meaningful financial
services businesses like Reliance Industries, Tata group or for those groups that have financial
services that banks are not allowed to undertake mainly Aditya Birla Nouvo and also Reliance
Capital.
Why groups with existing NBFCs have to bring down their return
expectations?
Take M&M Finance, for example. M&M owns 65% of M&M Finance. Now M&M will have to
transfer this to a bank, which will be held by M&M through an NOHC. The NOHC will have to
bring down its stake in the bank to 40% within two years, 20% within 10 years and 15% within 12
years. Also, currently M&M Finance earns an RoA of 4.5% and RoE of 24%. The best private
bank earns an RoA of 1.6% and RoE of <20%. So promoters who already own financial
businesses will have to bring down their expectations of returns from financial and banking
businesses.
Key guidelines
Only private entities can float banks: Only entities/groups in the private sector that are owned
and controlled by residents shall be eligible to promote banks. So, as of now REC, PFC, IFCI do
not qualify as bank promoters. Even LIC Housing is doubtful as its promoter is state owned.
Entities with substantial stock broking and real estate construction activities cannot float
new banks: Entities/groups that have significant (10% or more) income or assets or both from/in
such activities, including real estate construction and broking activities taken together in the last
three years, shall not be eligible to promote banks. All the large NBFCs meet this rule and
therefore qualify for banking licenses. Reliance Capital, too, meets the norm because while its
capital markets business is large its broking business is small. IndiaBulls does not qualify
because of its real estate activities.
Applicants will be required to list group companies undertaking key business activities.
Structure – NOHC structure mandatory
Promoter/promoter groups will be permitted to set up a new bank only through a wholly-owned
Non-Operative Holding Company (NOHC), which will hold the bank as well as all the other
financial services companies regulated by the RBI or other financial sector regulators. The
objective is that the Holding Company should ring fence the regulated financial services
activities of the group including the new bank from other activities of the group, i.e.,
commercial, industrial and financial activities not regulated by financial sector regulators. Thus,
only non-financial services companies/entities and individuals belonging to the promoter group
will be allowed to hold shares in the NOHC. Financial services companies belonging to the
promoter group would be held by the NOHC and would not have shareholding in it.
The NOHC will be registered as a non-banking finance company (NBFC) with the Reserve
Bank and will be governed by a separate set of prudential guidelines.
The NOHC will not be permitted to borrow funds for investing in companies held by it. It will
just be a vehicle to hold the investments in all regulated financial sector entities on behalf of
the promoter/promoter group for regulatory and prudential comfort.
The initial minimum paid-up capital for a new bank shall be Rs5bn. The actual capital to be
brought in will depend on the business plan of the promoters.
Shareholding of NOHC in a bank
The NOHC shall hold a minimum of 40% of the paid-up capital of the bank, which shall be
locked in for a period of five years from the date of licensing of the bank.
Shareholding by the NOHC in the bank in excess of 40% of the total paid-up capital shall be
brought down to 40% within two years from the date of licensing of the bank.
In the event of the bank raising further capital during the first five years from the date of
licensing, the NOHC should continue to hold 40% of the enhanced capital of the bank for a
period of five years from the date of licensing of the bank. Capital, other than the holding by
NOHC, could be raised through public issue or private placements.
The shareholding by the NOHC shall be brought down to 20% of the paid up capital of the
bank within a period of 10 years and to 15% within 12 years from the date of licensing of the
bank and retained at that level thereafter.
The aggregate non-resident shareholding from FDI, NRIs and FIIs in the new private sector
banks shall not exceed 49% for the first 5 years from the date of licensing of the bank. No
non-resident shareholder, directly or indirectly, individually or in groups, will be permitted to
hold 5% or more of the paid up capital of the bank. After the expiry of 5 years from the date of
licensing of the bank, the foreign shareholding would be as per the extant policy.
Groups that have existing NBFCs need to convert to a bank: The promoter/promoter group
with an existing NBFC, if considered eligible for a bank license, will have two options: (a) Promote
a new bank, if some or all the activities undertaken by it are not permitted to be undertaken by
banks departmentally. In such cases, the activities undertaken by the NBFC which banks are
allowed to undertake departmentally, will have to be transferred to the new bank, or (b) Convert
itself into a bank, if all the activities undertaken by it are allowed to be undertaken by a bank
departmentally.
Additional considerations in respect of promoter groups having 40% or more
assets/income from non financial business
In respect of promoter groups having 40% or more assets/income from non financial business,
the following additional requirements will be applicable:
The board of the bank should have a majority of independent Directors.
The exposure of the bank to any entity in the promoter group, their business associates, major
suppliers and customers shall not exceed 10% and aggregate exposure to such entities shall
not exceed 20% of the paid up capital and reserves of the bank, subject to compliance with
the provisions of Section 20 of the Banking Regulation Act, 1949. All exposures will have to be
approved by the board and all credit facilities to these entities should have a minimum tangible
security cover of 150%.
The bank will have to file a return, certified by statutory auditors, on quarterly basis of all
exposures including credit facilities extended to the entities in the promoter group, their
business associates, and major suppliers and customers for amounts in excess of Rs10m.
Banks would be required to seek prior approval of the RBI for raising paid-up capital beyond
Rs10bn for every block of Rs5bn. While examining such proposals, the RBI shall primarily
look into whether the bank has indulged in connected lending and self dealing, whether the
corporate governance standards are adequate, whether information from promoter group has
been forthcoming to facilitate consolidated supervision and whether the board members
remain ‘Fit and Proper’.
If the RBI is not satisfied about compliance with the above provisions, it would take severe
deterrent action as per law and licensing conditions.
Rationale for new banking licenses
While existing banks complain of excess competition, here’s the government’s rationale for
persuading the RBI to issue new licenses:
Despite the existence of over 100 commercial banks with huge branch networks only over
20% of the population has bank accounts.
New banks are required to take the RBI financial inclusion principles one step ahead.
A lot of corporates that do not currently own banks find returns in the financial industry
attractive and are keen to set up banks not to finance group activities but to be in a new
business with high returns.
Timeline
We believe the RBI will take another 3-6 months to finalize these guidelines. Some clauses will
be left ambiguous so that the central bank retains the choice of denying licenses to some who
qualify on paper but not in principle.
Longer term thoughts: Will HDFC need to merge with HDFC Bank?
The RBI has recommended NOHC for new banks in which all businesses that a bank can legally
undertake must be carried out by the bank only, not by a separate NBFC. What happens to
existing groups especially HDFC? Will they have to follow the same structure? Will that mean a
merger of HDFC and HDFC Bank? The RBI will eventually clarify on what structure existing
players need to adopt.
M&A – Positive for old private banks, negative for very new banks
With a few large groups are likely to enter banking, the space is likely to get competitive. This is
positive for old private banks that already fulfil most priority lending targets as they will be likely
takeover candidates. It is negative for the very new private banks like Yes Bank.
No comments:
Post a Comment