Tata Sons, the Rs 5.27 lakh-crore salt-to-software conglomerate, has withdrawn plans to set up a commercial bank, seemingly restricted by the rule that requires consolidation of existing financial services businesses under a single arm, which could affect the group’s operations with a vast global footprint.
“Tata Sons has reached a conclusion that the group’s current financial services operating model best supports the current needs of the Tata group’s domestic and overseas strategy,” Tata Sons said in a statement.
Tata Sons’ surprise pull-out comes barely two months before the Reserve Bank of India (RBI) is expected to grant new licences to a new set of banks to in decade.
More than four out of ten adults in India still do not have a bank account – a statistic that underlines the urgency of financial inclusion prompting the need for granting new bank licences.
Tata Sons was among the 26 candidates that had applied for a licence with the RBI under a new set of rules that require offering banking services through a “wholly owned non-operatiing financial holding company (NOFHC)” that will hold the bank and other financial services companies in the group.
With more than 1,000 group companies, most of them having strong overseas presence, the company found it extremely complex to comply with these RBI norms.
For example, about 64% of the group’s revenue is from international operations and companies with overseas presence need to provide financing solutions to their customers.
“Since all financing companies in the group need to be under the NOFHC, there could be situations, wherein a given country is not a priority for the proposed bank, but extremely important for an operating company. An equitable framework needs to be agreed on how some of these situations will be addressed,” Tata Sons told HT in a detailed response.
“Overseas financing is further complicated as the law in some countries require the operating company to partner with a local bank” it said.
“Compliance of such requirements would not be possible under the existing guidelines wherein all financial services entities in the group necessarily need to be owned by the NOFHC and no group company can have a direct shareholding in entities. Whether such a restructuring would be of value to operating companies was also a question that was examined,” the Tata Sons response said.
In June, Mahindra & Mahindra opted not to apply for a licence, also opted not to apply for a licence citing similar rules that require converting all its existing finance company branches to full-service bank offices within 18 months and set up at least 25% of its branches in villages.