Indian Billionaires Vie To Set Up Banks After New License Guidelines

Indian billionaires Kumar Mangalam Birla and Anil Ambani are among several corporate players keen to set up their own banks in the world’s second most populous nation, reported Bloomberg News on Monday, after the government announced changes to its banking license guidelines last week – in order to boost banking accessibility and credit growth in the nation’s rural areas.

Indian billionaires Kumar Mangalam Birla and Anil Ambani are among several corporate players keen to set up their own banks in the world’s second most populous nation, reported Bloomberg News on Monday, after the government announced changes to its banking license guidelines last week – in order to boost banking accessibility and credit growth in the nation’s rural areas.

In a statement on February 22, India’s Central Bank, the Reserve Bank of India (RBI), said that any company with a 10-year track record and “sound credentials” could apply for a banking license until July 1, paving the way for India’s first new banks since the formation of Yes Bank in 2004.

The new banks however would be required to set up one-in-four of their branches in villages with less than 10,000 people, according to the statement, while foreign ownership in the bank must be capped at 49 percent for the first five years.

[quote]”India has a huge population of unbanked (people) … and the real concern is financial inclusion,” told Rupa Rege Nitsure, a chief economist at the Bank of Baroda, to Reuters.[/quote]

“The Indian banking industry can do with a little bit more competition,” added Uday Kotak, managing director of Kotak Mahindra Bank, in an interview with Bloomberg last month.

Regulators need to ensure that “some of the issues faced in other sectors, which have led to a perception of cronyism, do not get repeated when banking licenses are issued,” Kotak added.

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According to Bloomberg, Birla’s Aditya Birla Group and Ambani’s Reliance Capital Ltd. have already announced plans to apply for the licenses. Other major Indian conglomerates including Religare Enterprises – controlled by the billionaire brothers Malvinder and Shivinder Singh – and the Mahindra Group have also expressed interest in setting up their own banks.

[quote]“With the economy growing, rural India is emerging as the new frontier,” said Ajit Mittal, a director at Indiabulls Group, in a telephone interview. “Setting up branches there will be a good proposition for groups with requisite skill sets.”[/quote]

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State-run companies will also be allowed to set up banks, according to the rules. Still, the RBI’s vetting process means that licenses are unlikely to be issued until late 2014 or early 2015.

Some critics, including the International Monetary Fund, have voiced concern that the new banks may possibly issue potentially risky loans to their related companies.

While welcoming RBI’s guidelines for grant of new bank licences as “well-thought through”, Deepak Parekh, chairman of financial services giant HDFC Ltd, also said that creating larger banks – by consolidation – was a greater need for the Indian banking space than increasing the number of players.

“I think that the RBI guidelines for grant of new licences are well thought-through and it seems that a lot of thinking has gone into it,” told Parekh to the Press Times of India. However,”I have always said that we need consolidation, rather than more players in the Indian banking sector.”

[quote]”The need today is for more consolidation than the new banks, because what we require is large-scale banks (to match the size and scale of international banks).”[/quote]