MUMBAI, Feb 11 (Reuters) - India will soon allow corporate
houses to open banks despite misgivings within the central bank
as well as the International Monetary Fund that it could lead to
risky loans if newcomers succumb to the temptation of lending to
their related firms.
The Indian government wants to reform a sector dominated by
often lethargic state banks and which only reaches half the
country's households. Ultimately, it hopes issuing banking
licences to corporate groups -- India's biggest conglomerate,
the Tata Group, is reported to be interested -- will provide
fresh impetus for an economy that has struggled to close the gap
with emerging market star China.
Final rules, expected soon, have been delayed over
disagreement between the government and central bank on whether
the traditionally more financially volatile sectors of property
and brokerages should be allowed to apply for licences, which
the Reserve Bank of India opposes.
Opponents of the new measures worry the reform, driven by
the finance ministry, could backfire if risky loans from one
branch of a company to another go bad and trigger a broader
"It will be like one person is cooking and the same person
is eating it," said one critic, V.K. Sharma, chief executive of
LIC Housing Finance.
"Most of the time if they need money they will go to their
own bank, and it will be difficult to regulate that," Sharma
said. His firm, an arm of state-owned Life Insurance Corp of
India, plans to apply for a banking licence.
The RBI regulates banks and has the final say on how the
rules are shaped and implemented, but is not statutorily
independent so takes the government's views into consideration.
"We are not at all happy with this," a central bank official
said, echoing similar comments from several other RBI officials,
on allowing corporate houses into banking. They declined to be
identified given the sensitivity of the matter.
The RBI is not alone in its caution. Regulators in the
United States and South Korea do not allow industrial houses to
set up banks; Australia, Canada, Britain and Hong Kong allow
them to, but with restrictions on ownership and voting rights.
Even the IMF has urged caution, saying in a report on India
last month the risks may outweigh the benefits.
"The basic issue is the possibility of self-dealing," said
Anand Sinha, the deputy RBI governor in charge of banking
operations. "This is a risk which everybody recognises across
the world, so that is why we have prescribed many safeguards."
Sinha said final rules would be issued soon. "When there is
consultation, obviously you have to take into account the other
side," he said on the sidelines of an event on Friday.
Part of India's rationale for allowing companies to open
banks is to extend "financial inclusion", something the
state-dominated banking sector has been slow to address.
No new Indian bank has been formed since Yes Bank
in 2004. Proponents of issuing more licences hope deep-pocketed
corporate-backed banks will bring the technology and appetite to
operate in under-served markets.
About half of Indian households in the country of 1.2
billion are outside the banking system and branch penetration is
low. India has about one-fourth the ratio of branches to adults
that Brazil has; in the Philippines the density is even lower.
At least 10 companies, mostly finance firms that are either
affiliated with a corporate house or independent, are lining up
to apply for licences.
L&T Finance, part of construction and
infrastructure conglomerate Larsen & Toubro Ltd, and
billionaire Anil Ambani's Reliance Capital, are among
those that have said they are keen to apply for a licence.
The Tata Group is also expected to apply through its Tata
Capital arm, several newspaper reports said. Tata Capital
declined to comment.
Hopefuls covet the chance to access cheap funds from
depositors, looking to emulate nimble private-sector players led
by HDFC Bank and ICICI Bank, which have
grown quickly and profitably since India loosened state
dominance of banking in 1995.
"You will be able to raise deposits, so funding will be a
lot easier," said Ajay Srinivasan, chief executive of Aditya
Birla Financial Services, part of Kumar Mangalam Birla's
industrial empire that ranges from telecoms and metals to cement
and retail, and plans to apply for a licence.
The Birla family, one of India's wealthiest, owned a bank
that like other private sector lenders was nationalised in 1969.
Many finance companies expected to apply for licences,
including Mahindra Finance, Bajaj Finance
and Shriram Capital, which are part of corporate groups, already
lend to borrowers who are typically outside the banking system.
Such applicants are expected to be looked upon favourably.
Known as a conservative regulator, the RBI is likely to
filter out applicants with heavy ownership concentration, poor
corporate governance records and weaker finances, officials
said. A large share of business in India is conducted by
family-run conglomerates with a controlling shareholder and
relatively low transparency.
In its draft, the RBI proposed to limit a bank's total
exposure to related companies to 20 percent of its paid up
capital and total reserves. Already, rules limit a bank's
exposure to a single borrower or industry.
Rajesh Chakrabarti, an Indian School of Business finance
professor, said India's draft rules look sufficiently tight to
The draft also says new banks must be set up through a
holding company, which will own at least 40 percent of the bank
for five years. That shareholding must be reduced to 15 percent
within 12 years, and banks will be required to list publicly
within two years of winning a licence.
Among the safeguards is a recent amendment to banking law
that empowers the RBI to inspect the books of banks' associate
companies in case of wrongdoing, or even to supersede a board, a
change implemented to placate the RBI's concerns.
"There will be clear firewalls and red lines which cannot be
crossed," Finance Minister Palaniappan Chidambaram told Reuters
Television in London on Jan. 29.
(Additional reporting by Shamik Paul and Neha Dasgupta; Writing
by Tony Munroe; Editing by Neil Fullick)