The Reserve Bank of India on Thursday issued a banking licence to Kotak Mahindra Finance Ltd. This sets the stage for the birth of a new private sector bank after a gap of seven-and-a-half years.

The last private bank was set up in September 1995 when IDBI Bank, promoted by a financial institution, got a banking licence. KMFL is the first instance of an existing non-banking finance company becoming a bank. The bank will be called Kotak Mahindra Bank Ltd.

The KMFL scrip jumped 9.03 per cent (by Rs 14.35) — the largest gain among the top 10 stocks in the A group--on the Bombay Stock Exchange to close at Rs 173.35 amid volumes of 40,760 shares.

On the National Stock Exchange, the stock gained 9.42 per cent (Rs 14.90) with volumes of 72,646 shares.

On January 31 last year, the RBI granted "in-principle" approval to KMFL, and three Indian finance professionals who teamed up with Rabo India, to set up commercial banks.

The in-principle approval was valid for a year to enable the applicants to mobilise the Rs 200 crore (Rs 2 billion)
start-up capital and fulfil other conditions. These approvals were based on the recommendations of a high-level committee, chaired by former RBI governor I G Patel.

While KMFL has got the licence, Rabo India is believed to have sought an extension of time to come out with a concrete plan. The central bank may grant the extension provided there is a valid reason for seeking it, sources said.

When contacted, Rana Kapoor, CEO & Managing Director, Rabo India Finance, said: "We are most definitely proceeding with our bank. We are a few weeks away from full-fledged operations as a bank."

Uday Kotak, KMFL executive vice-chairman and managing director, told Business Standard: "We will start the banking business before the end of fiscal year 2003. We need to move the registrar of companies for changing the name first. The bank's board will meet next week."

As a bank, Kotak will start with zero net non-performing assets and a 30 per cent capital adequacy ratio. KMFL's net worth stood at Rs 544 crore (Rs 5.44 billion) on March 31, 2002. It has Rs 200 crore (R 2 billion) worth of public
deposits and one lakh customers. The total customer base of the group is 500,000.

The total requirement to meet the cash reserve ratio and statutory liquidity ratio of the bank is around Rs 350 crore (Rs 3.5 billion). "We have already invested the SLR in gilts," Kotak told Business Standard.

According to him, the bank will look for a good mix of retail and corporate businesses in the ratio of 2:1. "The RBI has given us permission to convert 30 KMFL branches spread across 20 locations into bank branches. We will relocate them," Kotak said.

McKinsey & Co advised KMFL on the business strategy and the Delhi-based Momentum on creating the bank's brand while I-Flex worked on the technology platform.

KMFL is the majority shareholder in Business Standard Limited.

In the run-up to rolling out commercial banking operations, KMFL merged four of the promoters' investment companies - Guldasta Investment & Trading Ltd, Scope Holdings Pvt Ltd, Twilight Holding Private Ltd, Mega Assets & Capital Management Pvt Ltd - with itself.

The promoter's shareholding in KMFL now stands at 60 per cent, with Kotak (and family) holding 56 per cent and Anand Mahindra holding a 4 per cent stake. The rest of the equity is held by the public.

 KMFL had held about a 12 per cent stake in Bank of Madura. After ICICI Bank took over Bank of Madura in 2000, KMFL acquired shares of ICICI Bank which were later sold in the open market.

 With a licence to start a bank, the Kotak group provides a full range of financial services, ranging from investment banking to car finance to insurance and broking.

KMFL holds a 74 per cent stake in its insurance subsidiary OM Kotak Mahindra Life (a joint venture with Old Mutual Plc), a 75 per cent stake each in Kotak Securities and Kotak Mahindra Capital Company and a 60 per cent stake in Kotak Mahindra Primus ( a joint venture with Ford Credit International Inc).