<div>Mahindra and Mahindra Financial Services’ (Mahindra Finance) decision not to press ahead with a banking licence is an indicator of the thorny path that lies ahead for such aspirants. In its statement filed with the Bombay Stock Exchange, the non-banking finance company said “its board has decided not to proceed with the application for a banking licence after reviewing the implications of the present guidelines issued by the Reserve Bank of India (RBI)”<br /><br />Among the sticking points cited by the NBFC are norms on the opening of branches and issues in compliance with reserve requirements -- the cash reserve ratio (CRR) and statutory liquidity ratio (SLR).<br /><br /><strong>Tough norms</strong><br />Under the central bank’s guidelines for new bank licence applicants, 25 per cent of a new bank’s branches have to be in rural areas with populations under 10,000 and without existing banking services. The stipulation is to ensure the country’s unbanked areas are penetrated -- a stance articulated by then Finance Minister, Pranab Mukherjee, in the Union Budget for 2010-11 when he flagged off the need to have more new private banks.<br /><br />In its report on the trend and progress of banking in India (2011-12), the central bank says only one-fourth of agricultural credit reached small and marginal farmers. “Importantly, 13.6 per cent of it was absorbed by corporates, partnership firms and institutions engaged in agriculture,” it says. This is because banks feel it is safe to lend to the big fish within the priority sector pool. However, priority sector loans accounted for 50 per cent of the dud-loan mountain at the end of March 2012. So, it is going to be tough for new banks because the guidelines mandate they will have to open at least 25 per cent of their branches in unbanked rural areas.<br /><br />Mahindra Finance said under the new rules, it would have to convert each of its 670 branches into a bank branch over 18 months with 25 per cent in areas with population of under 10,000.<br /><br />A bigger headache is the norm on reserve requirements. Banks have to set aside 4 per cent of their deposits with the central bank; and invest 23 per cent more as SLR in government securities.<br /><br />“The regulations require that CRR and SLR norms will be applicable from inception, even though building of current account savings account will take some time for newly converted bank” Mahindra Finance said and added “this anomaly will impose an undue penalty on large asset financing NBFC.”<br /><br />In effect what it means is that it will take time for the NBFC to build up a low-cost deposit base to set aside for reserve requirements. It is unlikely the central bank will budge from its stand on the same, but the NBFC stated “if the guidelines are amended to permit co-existence of NBFC and bank in the same group or if concerns are addresses in some other manner, the company will be applying for the banking licence”.<br /><br />The norms will have a bearing on the kind of returns new aspirants will need to generate to justify the capital that needs to be pumped in. While the RBI has not mentioned the number of licences it will give out, the minimum capital needed is Rs 500 crore. The amount (about $93 million) is not high when compared to Malaysia’s benchmark of $618.8 million, Kuwait’s $257.3 million, Indonesia’s $331 million and Singapore’s $1,077.8 million, but you need deep pockets, nevertheless.<br /><br />The central bank’s deadline for submission of entries is July; among the aspirants are Shriram Finance, L&T Finance, Tata Capital, Aditya Birla Financial Services Group, Reliance Capital, Religare, Edelweiss and Bajaj Finance.<br /><br />raghu(dot)mohan(at)abp(dot)in</div>
