Setting up the NBFC Banking Corporation – Comprehending India’s new Banks policy

india’s new Banks are likely to have 25% branches in the rural regions, 40% promoter holding, a listing within 2 years and a FII cap of 49% for the first five years before being granted the freedom to sell the excess promoter stake that will no doubt hinder capitalisation for the first few years, and tak eon the interested FIIs to the extent of 74% as for other banks. Not a roster of choices the NBFCs wanting to be banks would have chosen.

So why is it that LIC Housing, L&T finance and M&M and Shriram Transport are interested in seriously becoming a bank holding company as per the new regulations. Apart from sacrificing their interests in broking and real estate that are more than 10% of revenues ruling out Religare and Indiabulls, the new banks will hold higher capital at 12% and hold all their interests tied together in Financial Services in a single holding cvompany, apparently from the point of view of preserving Capital. Of course, Real estate exposure will finally be allowed indirectly as and when LIC Housing and Infra Cos are permitted to egt abanking license but then even L&T Finance is hoping forr a nod for inorganic growth to kickstart its banking foray and that in itself may turn out to be a pipe dream despite its stakes in City Union Bank and Federal Bank.

However, the cases for Auto finance companies of Shriram and M&M may seem t be the most germaine and with substantial global bank interest in India, there may yet be a JV of interest with the 49% holding model allowing FIIs to explore the Indian territory rather than jump in with 100% WOS models with unlimited branch licences and retail expansion for banks holding more than 0.25% of banking assets of the country.

Then again, that is an exploration the right dealmaker in the right place can just about broach to a prospect. more likely would be a staid NOHC set up by these corprations and by LIC HSG to tie up their current Auto/Home finance companies and then set up aberand new bank limited to a NW of Rs 5 bn or more translating to a RWA of Rs 200 bln or $5bln in its first 5 years for every multple of 500 crores it brings in along with its FII partners ( at a debt equity of 5:1, and presumably with a higher tier I weightage in the first 5 years)

This will then serve a s a base for expansion and transfer of existing profitability from the NBFC portfolios may again have to be navigated with the regulator handholding them every step of the way. The ROE targets of global banks are just 12-13% now and these banks being an emerging market proponent with M&M having even an international presence int he more interesting EMs and planning for more would be under pressure to deliver much more