Raising the bar - RBI may tighten banking license norms Mar 05, 2010

Raising the bar - RBI may tighten banking license norms

March 05, 2010

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Raising the bar - RBI may tighten banking license norms

Impact

The Finance Minister, Mr. Pranab Mukherjee, announced in the Budget 2010, that more licenses will be issued to private sector players and Non Banking Financial Companies (NBFCs). This has many NBFCs and business houses excited about the possible opportunity to enter the banking space.

Among the NBFCs, Shriram group and SREI are expected to consider the possibility of converting themselves into a bank. Mr. S. Natarajan, Director of Shriram Capital said, "We will certainly apply for the banking license. Depending on the policy direction, we will start a new bank or seek conversion of NBFCs of the group into a bank".

Business houses such as Religare, A.V. Birla group, Anil Ambani group, Tata group and Bajaj Auto group have evinced interest in acquiring a banking license. Others like Indiabulls, Exim Bank, SIDBI and IFCI are also expected to consider the possibility.

To place things in perspective and to dampen any "over enthusiasm", the RBI has clarified, almost immediately, that norms and criteria will not only be adhered to, but may be made stricter to raise the bar and ensure that aspiring applicants fully understand the implications of obtaining a license. Increasing the minimum net worth requirement (currently Rs 300 crores) is a possibility. RBI has maintained that corporate houses may find it difficult to obtain a license and whilst a couple of licenses were initially issued to corporate houses, RBI may be stricter in the future.

According to Viren Mehta, Director of Ernst & Young, the key criterias which RBI may look at are:

Diversified ownership

Distinction of ownership from fit and proper management

Ability to infuse capital as required

Track record of the institution

We at Personal FN believe that the announcement made by the Finance Minister is quite bold and encouraging, but feel that RBI will continue to be strict in issuing licenses, and therefore in reality one may not see too many "new banks" on the street!

FIIs turn their "money" once again towards India

Impact

The Budget 2010 seems to have caught the attention of the Foreign Institutional Investors (FIIs) in a positive way. After showing negative net inflows of Rs 500.30 crore in January 2010, FIIs turned net buyers in equity to the tune of Rs 1,216.9 crore in February 2010. In March too (as on March 3, 2010), FIIs have made net equity investments amounting to Rs 2,586.4 crore.

(Source: www.reuters.com)

What really seems to have lured FIIs is the Budget 2010, where the major focus areas for growth were:

Infrastructure

Housing

Banking sector

PSU Disinvestments

Reduction in surcharge on corporates from 10% to 7.5%

Dr. Mark Mobius, Managing Director of Templeton Asset Management, also recently said in his comments about the four biggest developing nations - BRIC (Brazil, Russia, India, and China), that India's shares may outpace other emerging markets as the Indian economy strengthens. He also mentioned that "India's economic fundamentals have also significantly improved. Unlike US and Europe, most companies have healthy balance sheets and strong cash flows in India".

We also are of the opinion that the Budget 2010 has paved the way for long-term economic growth, and will thus attract foreign investors. Hence investors should stay invested for the long-term to reap the fruits of their investments.

Health insurance cost set to soar

Impact

In the Budget 2010, the Finance minister, Mr. Pranab Mukherjee proposed to levy service tax on payments for the treatment or health check-up of a medical insurance policyholder, if it is made directly to the hospital or multi-specialty clinic by the insurer.

Hence, if an investor avails of a cashless facility under a medical insurance plan he will have to pay more for his premium. However, if an investor opts for the reimbursement facility (where policyholders pay the cost of treatment out of their pockets and then claim reimbursements from insurers), the premium cost will remain unchanged.

During the year, the Income Tax department had made a tax demand on Third Party Administrators (TPAs) who were making payment to hospitals on behalf of the insurance companies. The TPAs had also complained that the tax demands were in excess of their revenues and they were only conduit for the claim payments. However, now the Budget 2010 has made it clear that the payments made by an insurance company will be subject to service tax.

We believe that while this has clarified the incidence / applicability of service tax, it is nonetheless, a pinch on the investors' pocket as they will have to pay more for their medical insurance. Also, some ambiguity continues on how the premium will be determined, when it is payable at the beginning of the year, when the choice of "cashless" or reimbursement will be made by the individual later. Thus if all premium is increased, then those who choose "reimbursement", will stand to lose!

INTERVIEW

In an interview with CNBC TV 18, Mr. Raghuram Rajan, Professor of finance at the Booth School of Business, University of Chicago, expressed his views on the Budget and present inflationary situation in India.

On the Budget, he expressed that he is glad that India has accepted the debt target. But he believes that there are assumptions built into this acceptance, on whether we will be able to achieve the deficit reduction. He feels as the situation evolves, we will see whether those assumptions are optimistic or not.

According to him, there is a fair amount that the Government can play with. He explained this by citing an example, and said "in terms of disinvestment, or broad-basing shares, as it is now termed... I also like the fact that at least, thus far, the Government has been standing firm on petroleum price increases and so on. We do need to bring down the inefficient subsidies... So in terms of (the) road map, in terms of the key things addressed, I think the Budget is very good".

We at Personal FN completely agree with this view and have always maintained that implementation is going to be key to converting this "decent" Budget to a "great" Budget!

On the present inflationary situation in India, he expressed that the fact that we (India) have been rolling back some of these duties, by holding down prices, will lead to inflation at some point. According to him the problem with any of these measures in the past has been that, it holds inflation down and then we experience a steep adjustment, which lead to burst in inflation. Hence, he believes that we need to bring this (Indian) economy quickly into a situation where prices reflect fundamental values of the goods that are being consumed; otherwise this will have distortion building up, which will lead to problems down the line.

AND OTHER NEWS...

RBI Deputy Governor, Ms. Usha Thorat has indicated that they (RBI) will take longer than April to implement the base rate scheme. In fact, even Indian Banks' Association (IBA) had asked RBI to extend the deadline for base rate implementation by banks by three months to July.

Unit Linked Insurance Plans (ULIPs) would cost investors less, as the Government announced in the Union Budget 2010, an exemption in service tax on all other charges (premium allocation charges and administrative charges), except the Fund Management Charges (FMC). Hence in such a case policyholders can also expect an increase in Internal Rate of Return (IRR) of 40 - 50 basis points.

Employees Provident Fund Organisation's (EPFO's) key advisory body, Finance and Investment Committee (FIC) has recommended a 8.5% interest on provident fund deposits for 2010-11, the same returns given to the subscribers for the past five years. The decision on the interest rate recommendation will now be placed before the Central Board of Trustees for final approval.

The fiscal deficit soared at 34% to Rs 3.50 trillion in the first 10 months of the fiscal year against Rs 2.62 trillion a year ago. This is mainly on account of the stimulus measures taken by the government to prop up the economy hit by the financial crisis.

Credit Rating Agencies (CRAs), which were till now accountable only to the capital market regulator - Securities and Exchange Board of India (SEBI), may soon come under the ambit of RBI and Insurance Regulatory and Development Authority (IRDA), if the proposals from the panel head by Mr. K.P. Krishnan, Joint Secretary, Ministry of Finance, are accepted.

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