We see NBFCs promoted by large industrial houses — Mahindra & Mahindra Financial Services (MMFSL), L&T Finance (LTFH) and Bajaj Finserv (BJFIN) — as clear frontrunners for new bank licences. The final RBI guidelines for banking licences mandate that a non-financial listco be a promoter of the bank, which will preclude many aspirants.
The bar on PSUs, property developers and stockbrokers has been withdrawn from the final guidelines, but the insistence on NBFC balance sheets being merged remains. There is now clear visibility on the new licences, which are potential game-changers for the winners.
The new bank’s promoter stake has to be housed in an non-operative financial holding company (NOFHC) that is majority owned by a widely-held non-finserv listco. This gives large industrial groups like M&M, L&T and Bajaj an advantage over standalone NBFC/finserv companies.
This new specification negates some other changes like inclusion of property developers and stockbrokers in the list of eligible bidders.
Our reading is that bidding NBFCs have to merge into the new bank at the outset. The guidelines are silent on this, but we think the RBI will stick to its long-held rigidity on meeting CRR/SLR from day one. There will be no grandfathering for priority sector. This is a challenge for players with large balance sheets like SHTF and IDFC — easier for smaller players like MMFS and LTFH.
We see the process moving quickly now — applications have to come in by July 31 and, after initial screening, will be referred to a specially constituted independent advisory board. We think the new licenses will be issued by 1QCY14 – the new banks have to begin operations within a year of that.
We believe the rerating of potential winners is warranted — the improved long-term growth potential is the potential. The swings and roundabouts changes to near-term ROEs (Casa comes in, offset by reserve ratios and higher costs) is not the real issue. The heightened competition is, in theory, a threat to existing private players but we see the new players taking at least 4-5 years to make a real difference. The short-term challenge for existing players should be staff retention.