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India eases rules to set up banks

India eased rules that will allow billionaires including Kumar Mangalam Birla to set up banks in the world’s second-most populated nation, where 65 per cent of the adults don’t have access to financial services.

The Reserve Bank of India sought applications from companies with “sound credentials and integrity” to apply for licences by July 1, according to an e-mailed statement. Foreign ownership in the banks, which should have an equity capital of Rs5 billion ($92 million), will be capped at 49 per cent, according to the statement. Companies will have to set up 25 per cent of their branches in rural areas.

New banks will help Prime Minister Manmohan Singh, who resumed opening up the $1.8 trillion economy in September, to tap savings in rural areas and accelerate gross domestic product, which is expanding at the slowest pace in a decade. Only 35 per cent of India’s adult population has accounts with banks and other financial institutions, according to the World Bank. The global average is 50 per cent, it said.

“The only purpose of the banking system is to increase the flow of money into the system,” Shachindra Nath, group chief executive officer at Religare Enterprises, said in an interview to Bloomberg TV India. “It’s genuine for the government and RBI to expect that newcomers bring that in.”

Religare, controlled by billionaire brothers Malvinder and Shivinder Singh, said it will apply for the permit. Birla’s Aditya Birla Group is “eligible and will be applying” for the licences, said Ajay Srinivasan, chief executive of the group’s financial services business. State-run companies will also be allowed to set up banks, according to the rules.

“With the economy growing, rural India is emerging as the new frontier,” Ajit Mittal, a director at Indiabulls Group, said in a telephone interview. “Setting up branches there will be a good proposition for groups with requisite skill sets.”

Billionaire Anil Ambani’s Reliance Capital plans to apply for the permits, chief executive officer Sam Ghosh said. Mahindra & Mahindra Financial Services, a unit of India’s largest tractor maker, is also keen to set up a bank, said managing director Ramesh Iyer.

Still, the licences are unlikely to be issued until late 2014 or early 2015, A.S.V. Krishnan, a Mumbai-based analyst at Ambit Capital, said by phone on Friday.

India has 26 state-run banks, accounting for 76 per cent of outstanding loans as of March 31, according to the central bank.

The country’s 20 private lenders, led by ICICI Bank, held 19 per cent of the loan market, while 40 foreign banks accounted for the rest.