Reserve Bank of India Proposes Tougher Capital, Sale Rules for New Banks

Reserve Bank of India Proposes Tougher Capital, Sale Rules for New Banks
By Ruth David and Anoop Agrawal - Aug 29, 2011

India’s central bank recommended tougher capital rules for new lenders and mandatory share sales within two years as conditions for issuing new licenses for the first time in seven years.

New lenders will also have to open at least one in four branches in rural areas that have a population of no more than 9,999 people, the Reserve Bank of India said in draft guidelines posted on its website yesterday. The banks may need to meet a minimum capital requirement of 5 billion rupees ($109 million), more than double the requirement for banks in 2004. Foreign shareholding may be capped at 49 percent for new lenders for five years, the central bank said.

Stringent rules may restrict the number of entrants, according to Viren H. Mehta, a director at Ernst & Young LLP. The license winners will also face competition from State Bank of India (SBIN), which accounts for almost a fourth of India’s loans, and ICICI Bank Ltd. (ICICIBC) Companies including Larsen & Toubro Ltd. (LT) and billionaire Anil Ambani’s Reliance ADA Group have expressed interest in operating in a market where credit is forecast to expand 18 percent in the year to March 31.

“If a business group wants to get into the banking business, they have to be serious players,” said Mumbai-based Mehta. “Serious enough to even change their group structures to become eligible for a license.”

New banks will also need to maintain a 12 percent capital adequacy ratio, compared with the 10 percent mandated by the regulator when it set guidelines for new lenders in 2001.
‘Impractical’ Guidelines

The owners of the banks will have to reduce their stake to 40 percent within two years after they are given a license, according to the central bank. Governor Duvvuri Subbarao on Aug. 23 said public ownership of banks would inspire confidence in the financial system and mitigate issues of conflict of interest between shareholders and depositors in the banks.

“The guideline asking for a listing within two years appears to be a bit impractical,” said Hemant Kanoria, chairman and managing director at SREI Infrastructure Finance Ltd. (SREI) “It will be very difficult for branches in the rural areas to start generating profits in the first two years.”

SREI will wait for final guidelines before deciding on applying for a license, Kanoria said in a phone interview yesterday. The regulator has sought feedback by Oct. 31.

SREI climbed as much as 12 percent after the guidelines were released while L&T Finance Holdings Ltd. rose 10.1 percent to 50.8 rupees at the 3:30 p.m. close in Mumbai. Reliance Capital Ltd. (RCAPT) gained 9.6 percent to 377.25 rupees.

India’s Bankex index, which tracks 14 stocks including State Bank and ICICI, climbed 4.1 percent yesterday, trimming its loss this year to 20 percent.
‘Private Pool’

The proposed rules will ensure companies don’t use their banks as a “private pool of readily available funds,” Subbarao said on Aug. 23.

Business groups controlled by Indian residents with at least 10 years of experience may be eligible to set up banks, the central bank said yesterday. Companies that get 10 percent or more of their income or assets from real estate or broking in the last three years won’t be eligible for the licenses, according to the guidelines.

“We want a banking license and the guidelines announced are positive for us,” R. Sridhar, managing director of Shriram Transport Finance Co. said in an interview yesterday. “We may need some time to meet some conditions.”

To contact the reporters on this story: Ruth David in Mumbai at rdavid9@bloomberg.net; Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net
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