Indian billionaires vie to establish new banks

India’s bid to boost lending allows corporations to open banks.

Among the billionaires who have applied for or who intend to apply for banking licenses are the brothers Malvinder and Shivinder Singh who control Religare Enterprises Ltd; Anil Ambani, chairman of Reliance Power Ltd. and Reliance Capital Ltd and Kumar Mangalam Birla of the Aditya Birla Group.

The Indian government sees the move as part of an effort to reform a banking sector dominated by state-owned banks whose services reach about half India’s households. By issuing banking licenses to corporate groups, the government hopes to provide fresh impetus for an economy that is bent on closing the gap with China.

India’s 26 state-run banks accounted for 76% of outstanding loans as of March 31, according to the Reserve Bank of India. The country’s 20 private lenders held 19% of bank credit while 40 foreign banks accounted for the balance.

The new rules governing corporates that intend to establish banks provide that firms will have to set up a wholly owned, non-operative financial holding company and undergo a “fit and proper test” to win permits.

The holding company will own 40% of the bank, which will have to be reduced to 15% in 12 years. Lenders will have to sell shares within three years of starting operations.

Holding companies won’t be allowed to lend to firms owned by their founders under the new rules, which also don’t permit the banks to invest in any financial firms owned by their parent.

New banks will need to maintain a 13% capital adequacy ratio for three years, compared with the 10% mandated by the regulator when it set guidelines for new lenders in 2001.