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Bengal firm wins bank race, titans lose

April 2: The RBI today decided to award banking licences to Bengal-based Bandhan Financial Services and Chennai-based IDFC, snuffing out the hopes of several big boys of industry who had been jostling for the coveted honour.

The microfinance institution, which started operations in Bagnan, Howrah, in July 2002, and IDFC were picked out of a beauty parade of 25 contestants that included Anil Ambani’s Reliance Capital, Kumar Mangalam Birla’s Aditya Birla Nuvo, Bajaj Finserv, L&T Finance and LIC Housing Finance.

The new bank licences are being issued after a 10-year hiatus. The RBI last awarded permits to Kotak Mahindra Bank and YES Bank in 2003-04.

This is the first time that big industry houses have been allowed to bid for a bank licence after being virtually shut out since 1969 when several banks were nationalised. Some of the big players were disappointed with the RBI’s decision but refrained from making an official comment.

The RBI said it had decided to accept the recommendation of a high-level committee headed by former RBI governor Bimal Jalan to consider the case of India Post after consultations with the Centre.

Bandhan and IDFC, an integrated infrastructure financing entity that is listed on the country’s premier stock exchanges, will now have to comply with the RBI’s conditions within the next 18 months before they can start banking operations.

The RBI has issued 12 banking licences to the private sector since the banking arena was thrown open to private players.

Bank licensing had turned somewhat controversial when RBI governor Raghuram Rajan decided to seek the Election Commission’s guidance on whether or not to press ahead and announce the results of its vetting process when the election code of conduct was in force.

Finance minister P. Chidambaram had chided the RBI for doing so and said the tactless move sent out the wrong signal that the government might have some role to play in deciding the winners when it was solely an RBI-determined process.

Yesterday, the Election Commission gave the RBI the go-ahead to name the licence winners.

“We operate in the unbanked regions across 22 states and have a significant presence in the eastern region. That is one of the main reasons why we won the RBI’s approval. This is a great step forward for financial inclusion,” Chandra Shekhar Ghosh, the chairman and managing director of Bandhan Financial Services Pvt Ltd, told The Telegraph.

“Our board will meet this week to chalk out the necessary steps we need to take to meet the RBI conditions,” added Ghosh.

The new banks will need an equity capital of Rs 500 crore. The promoters will also have to establish a wholly-owned non-operative financial holding company through which they will be permitted to hold a 40 per cent stake in the bank.

The promoters’ stake will be locked in for five years. They will have to bring down their holdings to 15 per cent within 12 years. The bank will also have to be listed on the stock markets within three years from the date it starts operations.

Ghosh said: “We have a net worth of Rs 1,100 crore. The RBI has set a minimum capital requirement of Rs 500 crore. We have International Finance Corporation, a World Bank arm, and the Small Industries Development Bank of India as our investors with representatives on our board. So, capital won’t be a problem.”

Ghosh reckons the real challenge will be to recruit people with banking experience to run its banking operations in remote corners of the country. The RBI rules stipulate that the new bank must open at least 25 per cent of its branches in unbanked rural centres with a population of less than 10,000.

Monish Shah, senior director at consultancy firm Deloitte, said the challenge before Bandhan would be to not only convert its existing business model into a successful bank but also make it profitable.

Bandhan reported a net profit of Rs 208.5 crore in 2013. It had a loan book worth Rs 5,704 crore as of February 2014 and a very low percentage of bad loans at 0.14 per cent.

But it will now have to comply with tough operating conditions as a bank with the pressure to earmark 40 per cent of all loans to the so-called priority sector and comply with strict conditions on provisioning and reserve requirements.

Shah said those who failed to make the cut in this round need not be disappointed. “I expect that seven to eight banks will get licences from the RBI over the next two years. There is certainly space for more entities,” he added.


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