Who is more worried - RBI or license hopefuls?

Mon, 24 Dec Pre-Open

   Previous Close   

   09:30 am   

   11:30 am   

   01:30 pm   

   Closing   

Following the passing of the banking amendment bill, the Reserve Bank of India (RBI) has gained the power to grant new licenses. While investors seem to be rejoicing the same - given that stocks of the license hopefuls have shot up significantly in recent times - it must be kept in mind that the central bank would be going slow towards offering these licenses. This is because it would have to wisely select the firms, considering that the latter have no prior banking experience. The central bank is expected to move slowly and give out very few licenses - three to four is the number floating around - over the next twelve to fifteen months.

Given the RBI's general conservative stance, the licenses would definitely be issued with thought and care and not to everyone and anyone. But considering the kind of business houses that are vying such licenses, it does throw up one important question. Are they ready to be scrutinized by the central bank?

Apart from having significant control over bank's board, the RBI will also be allowed to inspect the investment company that sets up the bank. In addition, the other subsidiaries and associate companies of the holding companies will too fall under this category. As put by the business daily - in a way, the RBI will have complete visibility of most businesses of the group. Further, the central bank may also inspect the books of the flagship companies of these business houses in case the latter suffer losses; also it could ask the holding companies to cough up extra capital if worries of the group companies facing difficult times do come about. This would all be done to protect the interest of the depositors.

The RBI would be strict in its demands from the corporates, the latter which are not used to the same. This would especially be the case for those companies with complex structures. While the larger corporate houses may be able to cough up capital, the complex structures of the smaller firms - wherein capital may be transferred from other cash rich group companies - will bring them out of the shadow zone, making them answerable to questions never asked before.

Given the strict guidelines, reporting requirements and regulations in present times, it would be the banking license hopefuls that would be more worried, as compared to the RBI. But at the end of the day, we believe that these developments would only make the really serious hopefuls of attaining such licenses as opposed to those players who just think of this opportunity being a chance of value unlocking.