RBI’s New Banking Proposals: Who Stands To Benefit?

Proposals from an internal working group of the Reserve Bank of India to permit corporate entry into banking, permit promoters to hold on to a higher stake, and allow large NBFCs to convert into banks could have implications for a wide range of entities.

Brokerages believe that while it may take time for corporate-promoted banks to be set up, some of the other proposals could take effect relatively sooner.

Macquarie Securities

• At a time when bank failures are increasing in India, the decision to distribute licences could be controversial. We expect RBI to exercise caution in this regard and hence some recommendations may not come to fruition.
• We don’t believe industrial houses, even if they own NBFCs, will be allowed to open a bank or convert into a bank.
• The cap on promoters’ stake in the long run (15 years) may be raised from the current level of 15% to 26% of the paid-up voting equity share capital of the bank. This would be positive for Kotak Mahindra Bank as it cements its 26% stake and positive for IndusInd Bank if promoters are allowed to raise stakes.
• Banks currently under a NOFHC (non-operating financial holding company) structure may be allowed to exit from such a structure if they do not have other group entities in their fold. This could benefit Ujjivan Financial Services.

ICICI Securities

• Final recommendations are favourable for corporate houses promoted large NBFCs namely Bajaj Finance, L&T Finance, Mahindra Finance, Aditya Birla Capital, etc., who may now look forward to convert to a universal bank.
• Large NBFCs, such as Shriram, Piramal, Cholamandalam, may evaluate regulatory arbitrage of operating under a bank than NBFCs and, if favourable, may also eye a banking licence.
• Raising promoter’s stake to 26% will not only encourage NBFCs but will be positive for IndusInd Bank.
• Allowing banks to exit NOFHC structure if they do not have any other entities in their fold will be positive for some of the holding companies as there is scope for collapsing of holdco discount . IDFC Ltd. (post sale of asset management company), Equitas Holdings, Ujjivan Financial Services could be possible beneficiaries.

Emkay Financial

• The recommendation to increase promoter stake cap to 26% of paid-up equity capital over 15 years from 15% is on expected lines. However, we believe voting rights will still be restricted to 15%.
• The internal working group has recommended to do away with intermediate sub-targets of 40% in 5 years and 30% in 10 years. This should be positive for new small finance banks, including Equitas and Ujjivan, which otherwise had to go for significant promoter stake dilution.
• For non-promoter shareholding, a uniform cap of 15% of paid-up equity has been recommended for all sets of investors, including individual/non-financial shareholders, which was initially at 10% subject to due-diligence and the fit and proper criteria.
• We do not foresee intermediate competitive risk to incumbent private banks as building a sustainable banking business model for new licensed banks, importantly granular franchise, would involve a long gestation, huge investments and capital.

CLSA

• Positive for banks like IndusInd Bank where the promoter stake is lower than 26%.
• Issuing licences to business groups has been a contentious issue.
• Move to a bank structurally positive for HDFC, Bajaj Finance, LIC Housing Finance.
• Cost of CRR/SLR/PSL will have implications on near term P&L for these entities.

Investec

• This could be the most sweeping regulatory change if enacted in present form, since allowing private banks to function back in 1993.
• Believe that RBI will be cautious in awarding banking licenses to corporates with no experience in financial services.
• In failing to become a bank, large NBFCs might face more stringent regulations. This is generally negative for large NBFCs as banking transition is not an easy feat. Bajaj Finance may get the benefit of doubt but others should de-rate.
• NOFHC structure preferable with banks expected to convert post government enacting tax neutrality. Positive for select large banks like Kotak, Axis, ICICI Bank.
• Banks can exit NOFHC structure if there is no other group company positive for IDFC and Bandhan Bank.

Motilal Oswal

• View the report as progressive in nature.
• Market share gains to accelerate for private sector banks.
• Allowing NBFCs (even belonging to industrial houses) above asset sizes of Rs 50,000 crore to get banking licences would increase healthy competition, making the banking system more efficient, reducing intermediation cost, and ultimately increasing credit penetration in the system.
• M&A opportunities may also increase in the system as corporates with deep pockets may adopt this route rather than building from scratch.
• Prima facie, we see IDFC Ltd., Bajaj Finance, L&T Finance Holdings, Equitas, and Ujjivan to be key beneficiaries.

Jefferies

• Unwinding NOFHC of newer banks can cut holding company discount for Equitas, Ujjivan and IDFC Ltd.
• Chance for larger NBFCs like Bajaj Finance, M&M Finance, L&T Finance to seek a license.
• Absence of glide-path for compliance on CRR, SLR, PSL, rural-branches may be bit of a dampner.
• Existing banks may adopt new structure whereby holding company will stay on top an bank will be 100% subsidiary - parallel to other subsidiaries. Clarity on dual-listing key.
• Hike in limit on promoter-holding benefits IndusInd Bank.