To Bank Or Not To Bank On Indiabulls

A day after Indiabulls Housing Finance Ltd (Indiabulls) and Lakshmi Vilas Bank (LVB) announced its decision to merge and create Indiabulls Lakshmi Vilas Bank, the nation’s eighth largest private bank by assets, a Reserve Bank of India (RBI) release clarified that the merger announcement didn’t have the regulator’s approval “at this stage”.

This was to quell the speculation that the central bank’s nod was a given since its two nominee directors have been on the bank’s board. Incidentally, the mortgage company too has a couple of former RBI deputy governors on its board. One of them, SS Mundra, is heading a “reorganisation committee” to oversee the proposed merger.

The RBI will examine the proposal, “as and when received”, in accordance with the regulatory guidelines. Both the entities, I understand, are yet to submit the proposal to the central bank even as the Indian financial system seems to be vertically divided on the deal. There have been animated discussions -- not on the financials of the two or how long it will take for Indiabulls to get value out of the merger with a sick bank but whether the regulator should clear it.

The merger between a bank and a non-banking finance company or NBFC (in this case, a housing finance company or HFC) is not new. For instance, Bharat Financial Inclusion Ltd (formerly SKS Ltd) is being merged with IndusInd Bank Ltd; Capital First Ltd was merged with IDFC Bank Ltd; and Bandhan Bank Ltd is in the process of merging Gruh Finance Ltd with itself.

If Capital First is allowed to get the licence to bank (through merger with IDFC Bank), what’s the harm in welcoming Indiabulls into this club? The detractors point out that Indiabulls was one of the 27 applicants when the RBI opened the window in 2014 but it didn’t feature in the list of two that could make it. What has changed since then?

Also, Capital First and Indiabulls are chalk and cheese. The first was an NBFC, run by a banker-turned-entrepreneur, V Vaidyanathan. The latter is an HFC, the flagship entity of a diversified conglomerate with presence in housing finance, consumer finance, insurance, stock broking and even real estate.

Unlike Vaidyanathan who created an unconventional model of credit underwriting and collection at Capital First, Sameer Gehlaut, a mechanical engineer, started his entrepreneurship journey by setting up an online broking platform in 1999. In course of time, the group spawned many companies and Indiabulls today is the nation’s second largest housing finance company by assets.

Indeed, things have changed since 2013 when it had applied for a banking licence. For instance, the real estate business assets accounted for one-third of the group's assets at that time; it has come down to almost one-tenth now. In an interview with a national business daily, Gehlaut recently said he is willing to get out of the real estate business entirely if it becomes a bank.

Besides, the new on-tap licensing guidelines stipulate that not more than 40 per cent of the total assets/gross income of an aspiring bank should be generated from non-financial activities. In case of Indiabulls, it is less than 20 per cent. 

Finally, the shareholding of the promoters for a new bank is capped at 30 per cent of the paid-up voting equity capital within 10 years and 15 per cent by the 15th year. Gehlaut, who now holds 21.5 per cent stake in Indiabulls, will end up owning 19.5 per cent in the merged entity but is willing to pare it to 15 per cent before the merger becomes effective.

I am curious whether he will be ready to give up his executive role also to ensure better governance.

Incidentally, after being denied a banking licence in 2014, in November 2015, Indiabulls acquired close to 40 per cent stake in OakNorth Bank, one of the so-called challenger banks in the UK. I presume that such an acquisition could not have been done without the nod of the RBI and, of course, the Bank of England. By November 2017, it had sold part of its stake and made more than what it had invested in the bank which specialises in giving loans to small and medium enterprises (SMEs) on a smart technology platform.

If it gets the RBI nod, the proposed Indiabulls Lakshmi Vilas Bank may replicate this in India. To start with, its assets will be disproportionately tilted towards real estates but a large segment of Indiabulls consumers can be sold SME products to diversify the portfolio. Gehlaut, in his interview, said they would not look for any relaxation in the terms of meeting the RBI norms for holding government bonds and keeping cash with the regulator.

Indiabulls has been discussing the proposal for months before both the boards met to seal it. To be sure, LVB had very little option but to be taken over by a stronger entity; and Indiabulls, or, for that matter, all NBFCs which do not have access to public deposits, need to convert themselves into banks for growth and even survival, in some cases.

I would not like to second guess the regulator’s call because a banking licence, unlike say a licence to enter the telecom or gas business, is not sold to the highest bidder. It goes to those who the RBI finds “fit and proper”. Does Indiabull meet this criterion? Let the central bank decide on this but none can deny the fact that India needs more banks for competition and caring for customers and the NBFCs cannot survive in their present form. If LVB is merged with a bank instead, we will have one bank less.

Historically, India has been a paradise for NBFCs. Till 1997 when the RBI Act was amended to create a comprehensive regulatory framework for the NBFCs, there were 40,000 such companies. Now, after close to a thousand NBFCs have lost licences for not having adequate capital, there are at least 9,000 of them.

But the banking landscape is very different. If we leave the regional rural banks, local area banks, and payments banks out, India has 96 banks, translating into one bank for 13.8 million people. Including them, one bank caters to 8.2 million Indians. In the US, there are 5,358 banks, covered by the Federal Deposit Insurance Corp, each catering to 59,724 people. Even neighbouring Sri Lanka has one bank per 827,000 people.

Finally, the logic that NBFCs don’t take deposits and hence are a lesser threat to the systemic stability compared with a bank is a fallacy. Large NBFCs are equally systemic risks as they too deal with people’s money. Not in the form of public deposits but isn’t the money they borrow from the banks and mutual funds also public money?

To read the author's previous columns, please log onto http://bankerstrust.in/

This column first appeared in Business Standared/ https://www.business-standard.com

The columnist, an author, is a Consulting Editor of Business Standard and Senior Adviser, Jana Small Finance Bank Ltd.

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