Macquarie: Will corporate houses get banking licenses? Decision to distribute licenses could be controversial

The ultimate power of fit and proper criteria and due diligence rests with RBI.  Why are we sceptical about the realistic implementation of these rules? Irrespective of these guidelines, RBI is the final deciding authority. A corporate house like Larsen & Toubro was not given a banking license by RBI. While Uday Kotak has been allowed to hold a 26% stake in Kotak Mahindra Bank, the promoter Hindujas’ plea for raising its stake in IndusInd Bank (applied in March 2020) has yet to be decided by RBI. While RBI has reservations about a single entity owning more than a 10% stake in a private sector bank, Prem Watsa’s Fairfax was allowed to hold more than a 50% stake in Catholic Syrian Bank. The message here is that RBI is the sole deciding authority, regardless of the IWG recommendations. While rules can be black and white, fit and proper criteria and due diligence will remain a grey area, in Macquarie’s view.

The timing of this report is quite surprising, coming amidst a spate of bank failures:

At a time when bank failures are increasing in India, the decision to distribute licenses could be controversial, in Macquarie’s view. They expect RBI to exercise caution in this regard and hence some recommendations may not come to fruition. For example, the Dr. Nayak Committee in May 2014 suggested that a class of investors called Authorised Bank Investors (ABI) be allowed to hold a 20% stake in private sector banks without any regulatory approval. The recommendations of that committee were never implemented. By the same token, we don’t believe industrial houses, even if they own NBFCs, will be allowed to open a bank or convert into a bank. The experience of allowing corporate houses to run banks has been pretty bad for RBI (eg: Times Bank, Bank of Rajasthan, etc) and thus, we do not believe RBI will grant licences to corporate houses. Note, on-tap licensing is currently available but RBI has not issued any licences.

What can realistically be implemented?

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 (Maintain buy rating with target price of Rs 1825 from pervious target of Rs 1435) as it cements its 26% stake and positive for IndusInd Bank (with outperform rating and target price of Rs 818, raised from previous target of Rs 749) 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 Service

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Stick with high quality banks – HDFC Bank and ICICI Bank

Macquarie continues to believe existing private sector banks like HDFC Bank and ICICI Bank will be long-term winners.