For new banks, it's a race against time

Aspiring candidates for banking licences hardly had any time to prepare the blueprint for their business, given the Reserve Bank of India had released the final guidelines on new bank licences on February 22 last year, while the deadline to submit applications expired on July 1, 2013.

Financial services companies certainly had an edge over the others in their preparation, as their primary business (offering loans) was similar to that of banks.

Even then, most players will need to burn the midnight oil to meet the deadline for creating a bank as well as specific norms set by RBI. 

For instance, they will have to set up the new bank within 18 months, after which the in-principle approval will lapse.

The immediate tasks will be to create a non-operative financial holding company (NOFHC), build a core banking software platform and establish retail and rural presence. Companies must also plan ways to achieve the medium and long-term objectives like listing on stock exchanges, and diluting the promoters' stake in the bank.

Creating NOFHC, ensuring sufficient capital

Under the guidelines, the NOFHC will hold the bank as well as all other financial services entities of the group.

The primary aim is to ring fence the regulated financial services entities of the group, including the bank, from non-regulated activities. Also, the bank will be ring fenced from other regulated financial services of the group.

Only non-financial services companies and individuals belonging to promoter group are allowed to hold shares in the NOFHC, while financial services companies (whose shares are held by the NOFHC) cannot be shareholders of the holding company. No financial services company held by the NOFHC will be allowed to engage in any business that the bank is permitted to undertake departmentally. 

Industry analysts say creation of this complex corporate structure should be the first item on the agenda, which some companies had already started working on.

While making applications, the promoters were required to furnish a road map that they would adopt to comply with corporate structure and realign the business between the entities to be held under the NOFHC.

The process needs to be completed within 18 months from the date of in-principle approval or before commencement of banking business, whichever is earlier.

Companies will also have to decide the board of directors (at least 50 per cent must be independent) of the NOFHC and the chief executive of the bank, and furnish the names to RBI.

In addition, they will have to follow a "viable and realistic" business plan, preferably of three-five years, that must also detail the ways in which the bank plans to achieve financial inclusion. 

The promoters must also bring in sufficient capital to run the bank. Analysts, however, feel that the promoters might have to bring in more than the mandated Rs 500 crore, if the expansion plans are ambitious.

The NOFHC and the entities held by it need to maintain a minimum capital adequacy ratio of 13 per cent of its risk-weighted assets for at least three years after start of operations. 

Software platform, retail and rural presence

Another immediate task will be to build a core banking software (CBS) platform for the bank, which will enable customers to operate their accounts and avail banking services from any bank branch.

While some of the financial services companies that had applied for banking licences were present in rural locations, the ones granted licences need to establish retail bank branches in these regions. At least a fourth of the branches have to be opened in unbanked rural centres. 

The eligible candidates must frame strategies to meet their priority sector lending targets - 40 per cent of their total loans, as is the case for existing banks. 

The product portfolio also needs to be ready. Bankers say typically, a new player initially focuses on corporate lending, while mobilising deposits from retail customers.

While retail deposits cost much less than wholesale borrowings, some experts feel new players will be tempted to offer higher interest on retail deposits than existing banks in a bid to mobilise low-cost funds aggressively.

The financial services players engaged in corporate financing already have an established risk management framework, and that should help. 

While most applicants already have a senior management team to lead the bank, those granted licences will have to focus on a recruitment drive to hire front-end staff to man the branches and back-end employees to ensure smooth functioning of the various businesses.

Promoters' stake dilution, listing

While reducing promoters' stake and listing on local exchanges may not be an immediate priority, experts advise they should have a plan ready to achieve these objectives, as timing the share sale will be critical to its success. 

Key Deliverables

Create a non-operative financial holding company (NOFHC)

Decide the board of directors of the NOFHC, CEO of the bank

Bring in sufficient capital

Build core banking software platform

Establish retail branch presence in both metros and rural geographies

Build product (both asset and liability) portfolio

Recruit front-end and back-end staff

Prepare strategy to pare promoters' stake, listing of the bank