The deadline for applying for bank licences ends today. Despite the 19 applications so far, post the guidelines and the clarifications, Ashvin Parekh of Ernst & Young does not see the RBI clearing more than 3-4 or maximum 5 successful candidates by the end of the process. The process will take about 4-6 months for completion.
Parekh says the conversion of NBFCs into banks will be an onerous process. Any NBFC above Rs 30,000 crore is going to find it extremely expensive to convert it into a banking company, he says.
Companies like L&T Finance Holdings , IDFC have a good chance of getting the licence as these are extremely respectful names in terms of governance and experience, says Parekh. He, however, emphasizes that to adhere to RBI guideline requirements, prospective banks will find it tough to get going.
Also Read: Postal department to apply for bank licence
Below is the verbatim transcript of Ashvin Parekh's interview on CNBC-TV18
Q: 19 applicants so far. Just to get some of the moving parts in place first, how long do you think this entire process is going to take and realistically, what is the chance of the Reserve Bank (RBI) clearing more than a handful of them? How many do you think would make it the whole way?
A: I must say that after the February guidelines and particularly after the June 3 clarifications on the queries that people raised, it is becoming increasingly evident that the number of applications, which we thought would be in the region of about 100-150, has come down.
You cannot expect more than 35-40, at the most 45 applications to begin with by the end of today. Non-banking financial companies, or NBFC, sector looked very hot, very encouraging till about the guidelines came out. Two-three issues raised by the guidelines have reduced the excitement around the NBFC sector. Structure is of course smaller, but more importantly conversion is a major factor.
Answering your question, after the guidelines and after the clarifications, I can't see more than three-four or five successful candidates at the end of this process. The process might take another six months to complete.
Q: How painful do you think that process of winding up large and performing NBFC businesses is going to be for some of these companies as they make the transition into a bank? How onerous a task do you think that is for them?
A: It is substantially onerous. There are two parts to the pain. First is the duration part that is how much are you really in a position to take your portfolio, the NBFC profit making portfolio into the bank over the period of time, which the RBI is now, the guidelines are now requiring. So that's one part of the pain.
The second part of the pain which is a real pain is that if you required to meet with the cash reserve ratio (CRR), statutory liquidity ratio (SLR) and priority sector lending ( PSL ), PSL may not be as harsh on NBFC, I am not talking of infrastructure NBFC for the time being, I am talking of the other NBFCs who have retail segments and who have also been serving Micro, Small and Medium Enterprises (MSME). For them, it may not be very painful but CRR, SLR will be in which case, lets say the amount of deposits that they maybe able to garner in a period of about three-four years.
It may not be adequate to really bring in that portfolio and relive the other liability which they may have picked up at a higher cost. So the whole argument of NBFCs getting into banking which was low-cost deposits, the current and savings account (CASA) deposits - that actually gets completely nullified on account of the fact that conversion has to happen within two years, six months of the process and 18 months after the in-principle approval is received. So it does become very painful. Any NBFC who is above Rs 30,000 crore is going to find it extremely expensive to convert it into a banking company.
Q: Let's talk about a few spaces that seem to be in pole position for getting that licence, faces like L&T Finance Holdings, IDFC that finally did bite the bullet and actually apply for a licence. Do they at this point meet most of the fit and proper guidelines that have been set out by the RBI?
A: Fit and proper, is a matter of regulators evaluation. It is nobody else's prerogative, the regulator has to decide. My submission is very simple. If the regulator wants a financially stable as well as a viable banking sector, that's on one side of the story.
The second is if it gradually wants to reduce the NBFC play in the sector, then in that case, all the names that you have mentioned are extremely respectful in terms of governance, in terms of their experience, in terms of even the way they have managed their operations in a frugal manner, in a very cost-effective manner. Good part of the borrowings are long liabilities which they raised at a higher cost than CASA, but they have managed their portfolio so very well. So those are the factors. If the regulator were to consider those factors then these names have a very good chance. I think they are the most respected names that you could ever think of.
On the other hand, if you look at the issue of conversion because they are all large-sized organisations, for them to convert into a banking company with all the guidelines requirements and the clarifications which have been rendered is going to be really difficult.
Q: There were some dark horses as well - Videocon for instance had admitted that they were looking to apply for a licence and may even look at tying up with a multinational corporation (MNC) bank in order to do that. How favourably do you think the RBI would look at something like that? Industry or a corporate that has no real history or leaning towards banking, but is willing to tie up with an MNC bank that may actually have much deeper routes with regards to banking?
A: Basically, the whole issue will come down finally to not just this particular name that you mentioned, but for each and every person who has applied. He will have a valid story. I am convinced that he will have a very proper, convincing kind of a plan to put forth before the regulator.
There are two-three issues. One is the regulator cannot really create so many banks all at the same time and the reason is very simple. If he were to do so then he will have to really monitor these banks closely. Any new bank, the history says, not just in India, but anywhere else till it is really performing for the first six-seven-eight years, it can be susceptible to any kind of economic cycle, any kind of one or two bad accounts or few bad accounts coming up all at the same time - these things have to be observed. The regulator has to be very mindful of that. You have to protect the deposit holder's interest. In such a situation, if the number of licences would be four-five then these many applications may not go through actually.
This news has just come in and complete details will follow shortly. We can send you an email alert when the details come. Register for your alert here.
