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Economy Jul 4, 2013

Bank licences: Those with financial muscle will gain, says Fitch

NEW DELHI: Global rating agency Fitch today said the 26 applicants for new bank licences in India face tough requirements that are likely to lead to only a limited number receiving licences and developing into substantial banks.

The central bank's objective to address financial inclusion places heavy demands on profitability and capital, and is likely to lengthen the time it takes for a successful applicant to establish a presence, Fitch said in a statement.

The Reserve Bank of India (RBI) requires new banks to open one in four branches in rural areas and fulfil statutory reserve requirements - including placing 4 per cent of deposits with the central bank and holding 23 per cent in government bonds from day one.

Reuters

Reuters

"We believe some entities will find the 40 per cent priority-sector lending targets tough, even though they have around three years to meet them. Infrastructure finance companies with large existing loan portfolios that have little or no prior presence in the required sectors are likely to find the target most challenging," it said.

The strict conditions mean that profitability for new banks is likely to be limited until they secure a strong foothold, it said, adding, the transformation of existing franchises will be slow, as most will have to start from scratch.

Successful applicants are likely to be those with financial firepower and strong management to handle the transition and growth, it said.

The number of applicants is less than the market's expectation, reflecting the high barriers to entry and regulatory restrictions that limit the competitive advantage of getting a bank licence - especially for established non-bank financial institutions (NBFI), it said.

"We believe the established NBFI applicants may be better placed to switch to bank status. Nevertheless, the move away from their core competencies and well-managed operations into new businesses and unfamiliar risks with additional regulatory hurdles, may put put pressure on their capital," it added.

PTI

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