August 30, 2011

RBI Draft Guidelines for Licensing of New Banks in the Private Sector Key Highlights of the draft guidelines are: 1. Eligible promoters: Entities / groups in the private sector, owned and controlled by residents, with diversified ownership, sound credentials and integrity and having successful track record of at least 10 years will be eligible to promote banks. Entities / groups having significant (10% or more) income or assets or both from real estate construction and / or broking activities individually or taken together in the last three years will not be eligible. 2. Corporate structure: New banks will be set up only through a wholly owned Non-Operative Holding Company (NOHC) to be registered with the Reserve Bank as a non-banking finance company (NBFC) which will hold the bank as well as all the other financial companies in the promoter group. 3. Minimum capital requirement: Minimum capital requirement will be INR 5 Bn. Subject to this; actual capital to be brought in will depend on the business plan of the promoters. NOHC shall hold minimum 40% of the paid-up capital of the bank for a period of five years from the date of licensing of the bank. Shareholding by NOHC in excess of 40% shall be brought down to 20% within 10 years and to 15% within 12 years from the date of licensing of the bank. 4. Foreign shareholding: The aggregate non-resident shareholding in the new bank shall not exceed 49% for the first 5 years after which it will be as per the extant policy. 5. Corporate governance: At least 50% of the directors of the NOHC should be independent directors. 6. Business model: Should be realistic and viable and should address how the bank proposes to achieve financial inclusion. 7. Other conditions: The exposure of bank to any entity in the promoter group shall not exceed 10% and the aggregate exposure to all the entities in the group shall not exceed 20% of the paid-up capital and reserves of the bank. The bank shall get its shares listed on the stock exchanges within two years of licensing. The bank shall open at least 25% of its branches in unbanked rural centres (population upto 9,999 as per 2001 census) Existing NBFCs, if considered eligible, may be permitted to either promote a new bank or convert themselves into banks. 8. In respect of promoter groups having 40% or more assets / income from non-financial business, certain additional requirements have been stipulated. View on the draft Guidelines Most of the RBIs draft guidelines are inline with earlier RBI framework for new banking licenses. In terms of capital requirement most of the NBFCs are well capitalized to form separate banking company & can infuse additional capital if required. The companys with rural focus, strong lending business with stable asset quality, superior corporate governance can be suitable candidates for new banking licenses. Real Estate and broking companies are not eligible for banking license & new banks will have foreign holding upto 49% against 74% allowed in private sector banks. In our view, companies like Shriram Transport, M&M Financial, Bajaj Finserve, Magma, IFCI & L&T Finance Holding Ltd are in better position to capitalize on this new opportunity to expand its existing business.

Wealth Research, Unicon Financial Intermediaries. Pvt. Ltd. Email: wealthresearch@unicon.in

August 30, 2011

Non-Banking Finance Companies - RBI working group recommendations
The RBI working group has recommended changes regarding registration, capital adequacy and prudential norms. Tier-1 capital requirement is to be raised to 12% (from 7.5%), asset classification and prudential norms would be, in a phased way, rendered similar as those for banks. The minimum net owned fund (NOF) requirement for all new NBFCs wanting to register with the Reserve Bank could be retained at the present INR 20 mn till the RBI Act is amended. The RBI should, however, insist on a minimum asset size of more than INR 500 mn for registering any new NBFC. Existing NBFCs below this limit may deregister or be asked to seek a fresh certificate of registration at the end of two years. Negative for small NBFCs. Asset classification and provisioning norms similar to banks to be brought in phased manner for NBFCs. Suitable income tax deduction akin to banks may be allowed for provisions made under the regulations. Accounting norms applicable to banks may be applied to NBFCs. NBFCs currently provides 25 bps standard asset provisioning, which will have to bring in par with banks at 40 bps. The risk weights for NBFCs that are not sponsored by banks or that do not have any bank as part of the group may be raised to 150% for capital market exposures and 125% for Commercial Real Estate (CRE) exposures. In case of bank sponsored NBFCs, the risk weights for Capital Market Exposures (CME) and CRE may be the same as specified for banks. Separate panel to deal with Priority Sector Lending The RBI has set up a separate committee of 9-member panel constituted under the chairmanship of Mr. M V Nair. The panel will revisit the eligibility criteria for classification of bank loans as priority sector including review of loan limits under the segment. Other key recommendations 1) RBI prior approval to transfer more than 25% stake; 2) mandatory credit rating for deposit-taking NBFCs; 3) NBFCs to be given benefit under the SARFAESI Act; 4) CAMELS-plus approach to be introduced for NBFCs; 5) mandatory disclosure of NPA coverage, asset liability profile, off-balance sheet exposure/structure products View Currently, most NBFCs have tier I capital above the threshold limit of 12% with limited reliance on tier II capital (~2-3%) like Shriram Transport at 23.4%, Magma at 22%. Proposed recommendation on Asset classification and provisioning norms is likely to increase the credit cost for NBFCs particularly for government-owned NBFCs like REC, PFC. This can also affect Shriram Transport, Mahindra Finance, LIC Housing Finance etc. In terms of exposure towards CRE & CME Reliance Capital, India Infoline, Indiabulls etc., currently have been assigning 100% risk weights for capital market and CRE exposure including loans against properties.

Wealth Research, Unicon Financial Intermediaries. Pvt. Ltd. Email: wealthresearch@unicon.in

August 30, 2011

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Wealth Research, Unicon Financial Intermediaries. Pvt. Ltd. Email: wealthresearch@unicon.in