Low cost deposit base key to new bank success, says ICRA

MUMBAI: Ratings agency ICRA today said that low-cost current and savings account (CASA) deposit base and some regulatory relief in the gradual build-up of priority sector lending targets hold the key to success of non-banking lenders wishing to become banks.

"Build up of CASA and a relaxation in gradual build up of the priority sector book hold the key to profitability of a new bank," the agency said in a note.

The return on equity for non-bank finance companies (NBFCs) will dip to single digits if no transition period is offered by the RBI for new banks to comply with the priority sector lending requirement of 40 per cent, it said.

It said if a NBFC's return on equity is at around 17 per cent at present, it would dip to level between 5 and 7 per cent, while if a staggered transition to priority sectior lending norms is allowed, the return of equity would be at 13 per cent.

Assuming full compliance with priority sector lending requirements, in order to get the return of equity back to original levels, new banks would have to get the CASA deposit numbers to levels of 30 per cent.

NBFCs which are already engaged in lending to sectors classified under priority sector lending norms would have an edge over others in this aspect, ICRA said.

The RBI issued its final guidelines for opening new banks on February 22 and allowed both corporates as well as public sector undertakings to enter the fray.

A slew of non-banking lenders, including the Shriram Group, L&T Finance Holdings and Indiabulls, among others, have evinced interest in applying for licences.

There is fierce competition to secure CASA deposits among existing lenders, with newest entrants like Yes Bank and Kotak Mahindra Bank offering higher returns on savings deposits after deregulation of interest rates.

"As target profile of new banks is likely to be similar to private sector banks, the intensity of competition among private sector banks, especially for liabilities is likely to go up," it said.

ICRA said other key factors determining profitability of new banks will include cash reserve ratio and statutory liquidity ratio requirements, higher provisioning requirements for banks because of stricter recognition of non-performing assets (NPAs) and the necessity of having 25 per cent branches in rural areas.

Some potential entrants are likely to be deterred due to requirements like diversified nature of the holding company, restrictions on share transfer, stringent exposure norms to group companies, besides greater supervision and scrutiny by the RBI, ICRA said.