* Half of India's population does not have a bank account
* Bank licence applicants include Reliance Capital, JM
* Applicants betting on long-term growth of India's bank
By Swati Pandey
MUMBAI, July 3 Indian companies looking to set
up the country's first new banks in nearly a decade have a long
and costly road ahead of them.
While corporate heavyweights from the Tata, Birla and Bajaj
groups to Anil Ambani's Reliance Capital Ltd are among
those applying for the right to establish full-fledged banks,
the pool of 26 hopefuls was smaller than analysts had expected.
Stiff requirements on branch placement and liquidity make
for an arduous path to profitability and scale, and have
deterred some would-be applicants.
"It will require a considerable amount of marketing expense,
branch expansion," said Vijay Mahajan, founder of microlender
Basix, which considered applying for a licence but did not.
"You have to be profitable at the same time. If you have a
bank which has losses for seven years continuously, nobody will
put their deposits there."
Indian banks must keep 27 percent of deposits at the central
bank and in government bonds, even in their startup years. That
means they can lend only 73 of every 100 rupees raised in
One in four branches must also be set up in rural areas
where no bank now exists - an expensive endeavour.
While those requirements are the same for existing lenders,
the rules were implemented after incumbent banks had already
built scale. For example, the rural branch criterion only
applies to new branches.
One blue chip corporate house expected to be among the
front-runners for a licence opted against applying.
Mahindra & Mahindra Financial Services Ltd, a
non-bank finance company (NBFC) and part of the Mahindra Group,
said it was put off by the liquidity rules and the requirement
to convert all existing branches to full-service bank offices
within 18 months while at the same time setting up new rural
FACTBOX-Indian companies apply for banking licence
BREAKINGVIEWS- India's aspiring banking moguls fail to
The lure of banking is the ability to raise low-cost
deposits and generate fat margins. Net interest margins for
Indian private sector banks are around 3.5 percent, among the
highest in the world.
Gathering retail deposits requires building up a branch
Yes Bank Ltd, which opened in 2004 and is the last
new bank in India, has said it wants to have 900 branches by
2015. With 430 branches at the end of March, it would need to
rapidly accelerate openings from its annual average pace of 56
over the last four years.
Yes Bank generates 18.9 percent of its deposits from current
and savings accounts. For mid-sized banks in India, the average
is 28-30 percent, said Manish Ostwal, an analyst at KR Choksey
Shares & Securities.
But to lure depositors, new banks like Yes Bank need to
offer higher deposit rates, eating into the margins they earn
Yes Bank, Kotak Mahindra Bank Ltd and IndusInd
Bank Ltd, among India's newer banks, pay 6 to 7
percent interest on savings deposits. Most Indian banks pay 4
As a result, Yes Bank's cost of funds - what it pays in
interest to depositors and through borrowings - was 8.6 percent
in the fiscal year that ended in March, while IndusInd's was 8.5
percent. The average among the three biggest private sector
banks was about 6.4 percent.
Like existing lenders, new banks will also have to make 40
percent of their loans to the "priority sector," including small
businesses, retail traders and agriculture, which tend to
generate smaller margins than other loans.
"Profitability will take a dip, it will take four to five
years to get to the same level of profitability as we are now,"
said Nirmal Jain, chairman of India Infoline Ltd, a
brokerage that applied for a bank licence.
The central bank has not said how many licences it will
award, although the number is widely expected to be around five
and the winners are expected to be named in 2014.
Besides the usual corporate heavyweights, strong candidates
include L&T Finance Holdings Ltd, part of India's
largest engineering conglomerate Larsen & Toubro Ltd,
as well as Shriram Capital, part of one of India's biggest
Some applicants roped in big names to bolster their chances.
JM Financial Ltd has tied up with former Citigroup
CEO Vikram Pandit. Reliance Capital lined up Japan's
Sumitomo Mitsui Trust Bank and Nippon Life Insurance
to own between 4 and 5 percent each.
"We are going for it because banks are much better placed
for long-term growth. It's a much better source for raising
funds and it's a stable business," India Infoline's Jain said.
($1 = 59.4312 Indian rupees)
(Editing by Tony Munroe and Ryan Woo)