No threat to existing players

Listed Indian banks may not have too much to fear from the RBI's decision to allow new players into the banking space.

The RBI's draft guidelines for issue of new bank licences sets fairly high entry barriers and stringent criteria for new corporates or business groups seeking to foray into the banking space.

For one, new banks in the private sector tend to take considerable time to acquire scale, as rolling out a branch network and acquiring clients as well as luring retail deposits will be an uphill task with the market is already served by 41 listed banks, and many unlisted and cooperative banks.

Kotak Mahindra Bank and Yes Bank, the newest entrants, started off operations way back in 2003-04, but have so far managed to garner only 2 per cent share of total advances between them. In terms of branch network as well, the total network is close to 600 branches as against the formidable branch network of 13,577 for SBI.

In fact, the banking system has mopped up around Rs 21 lakh crore more business (deposits plus advances) in the last 18 months even as new bank licences were being mulled, making the task harder for new entrants. Further, a larger number of licences issued may create competition among the new banks before it impacts incumbent banks.

Two, the RBI wants the new entrants to start out with 25 per cent of their branches in un-banked areas. That may be a tall order as existing banks have to adhere to this norm only for their new branches. Adhering to these norms right from the start will entail higher operating expenses.

Three, while new entrants have the option of taking over old private sector banks, the M&A route to gain scale would require a lot of capital as old private banks (being perpetually regarded as acquisition candidates) have strengthened their books and seen valuations shoot up due to restructuring of operations. Such acquisitions are also subject to RBI approval.

The RBI's norms such as a minimum capital requirement of Rs 500 crore, a 12 per cent capital adequacy at the outset, immediate adherence to priority lending norms and requirements such as a 10-year track record and “diversified” holdings for new corporates entering this business, set the bar quite high for new players.

That the new banks have to list within two years is going to prove a tough task too for the new kids on the block, given the difficult market conditions and the large universe already listed banks.

Amid these requirements, NBFCs with a diversified retail business appear to have better chances of transitioning to banks, given their scale (loan book) and branch network in un-banked areas. If all assets are not applicable to be transferred to the bank, only a few assets can be transferred allowing a head start.

Bajaj Finserv and L&T Finance Holdings, which have non-operating holding company model, seem to be among the most well placed.

COMMENT NOW