Norms bar brokerages, realtors from banking

Tags: News

Fineprint shows small rider will bar many aspirants

Contrary to popular interpretation over the weekend, the Reserve Bank of India (RBI) may have in one stroke actually barred a number of companies in speculative trades such as brokerages, realty and commodity firms such as those engaging in gold trading or gold finance from starting a bank without specifying these businesses.

In its final guidelines issued on Friday, the central bank stated that “the promoter or promoter groups’ business model and business culture should not be misaligned with the banking model and their business should not potentially put the bank and the banking system at risk on account of group activities such as those which are speculative in nature or subject to high asset price volatility.”

RBI’s silence on the specific nature of companies to be allowed a banking licence evoked popular interpretation that real estate and brokerages may in fact be allowed to enter the banking business, as it had dropped language in earlier drafts that would have kept out brokers and real estate companies. However, a reading of the fineprint of the new guidelines are open to the opposite interpretation with experts pointing to the riders quoted above.

Ashwin Parekh, national leader — financial services, at Ernst & Young said, “The new guidelines look stringent and rightly so. Though the regulator had not mentioned real estate or brokerage businesses, it stated that companies in speculative business would not be preferred. By saying this, it included a lot more companies which may be in speculative business like gold, commodities, brokerage and even real estate.”

“The idea is to ring-fence the new entities from risks that the group may face and also protect the depositors’ money from being diverted to risky ventures,” added Parekh.

In the draft guidelines, the RBI had specifically mentioned that brokerages and real estate firms would not be allowed to set up banks.

Shinjini Kumar, finance regulatory leader at PwC, said that the RBI wants the capital of the new banks to be stable. “So, it has reservations about firms in highly leveraged and risk-taking businesses. Though they have not mentioned real estate or the capital market, they have kept the definition broad for any kind of speculative business to be curtailed. Firms with businesses that are cyclical in nature may not get the nod of the regulator.”

New banks have to maintain a minimum capital adequacy ratio (CAR) of 13 per cent for at least three years, subject to the upward revision by the central bank and even on a consolidated basis.

Kumar added, “On the capital adequacy requirements, it is a bit unfair that the new banks need to keep CAR at 13 per cent, subject to upward revision. Even the non-operative financial holding company (NOFHC) will have to have a capital adequacy at the same levels is surprising. But, we need to wait for the detailed guidelines for NOFHC.”

manjuab@mydigitalfc.com

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