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RBI Issues Guidelines For New Banking License

By Vidrum Mehta | 2/25/2013 4:41 PM Monday

The Reserve Bank of India (RBI) came out with its much-awaited final guidelines on the New Banking License. This has come approximately three years from the first announcement in this regard made in the Budget speech of 2010-2011 by the then Finance Minister (Pranab Mukherjee). Since then, there was a discussion paper which was formulated by the RBI and the floor was open for suggestions, feedback and comments on the same. Thereafter, draft guidelines on the licensing were released by the apex bank, and these were also open to accept further views and comments from the industry.

Finally, in December 2012, after some vital amendments to the Banking Bill, the RBI, in consultation with the Government of India, came out with its final guidelines on the new banking license.

Some of the key final guidelines for the licensing of new banks in the private sector are as follows:

  • All companies or groups, whether private or public sector entities, are eligible to set up a bank, however, only through a wholly-owned Non-Operative Financial Holding Company (NOFHC). With this provision, the bank’s business would not be impacted by the company's or group’s existing business.
  • Further, the entity or group should have a past record of sound credentials and integrity. The company should also have healthy financial track records of 10 years. Further, the RBI may also investigate the above matter and check whether every enclosure mentioned by the company is correct. With this, only companies which have a good financial track record, excellent management team and good corporate governance would be eligible for a license.
  • The minimum capital required to start up is Rs 500 crore, of which the NOFHC shall hold a minimum voting stake of 40% of the paid-up equity capital which will be locked in for a period of 5 years. Going ahead, its stake shall be bought down to 15% within 12 years. Also, the aggregate foreign holding in the new bank shall not exceed 49% in the first 5 years. Further, the bank’s shares should be listed on the stock exchange within 3 years of the commencement of its business. This clause would result in better efficiency in the management’s working and their decision-making abilities. 
  • The bank will be governed under various provisions, acts and other guidelines and instructions issued by the RBI.
  • There should be at least 50% independent directors on the Board of the bank. This would help it to take holistic and correct decisions in running its business. Further, if a promoter and its group are from a non-banking background, some of the independent directors would serve as the most important on the board.
  • The NOFHC and the bank should not have any exposure to the promoter group and its other entities. This would insulate the bank from various other risks that are associated with other businesses and check the practice of giving concessions or incentives to the promoter group in case they are in need of funds. Hence, this guideline is of utmost importance.
  • The bank shall open at least 25% of its branches in unbanked areas (population upto 9999 as per the latest census data) and comply with the priority sector lending targets (40% of total advances) and respective sub-targets (Agr, SME, MSME) as applicable to the existing domestic banks. This would further strengthen the overall aim of financial inclusion in the country.
  • Existing NBFCs, if eligible, may be permitted to promote new banks or convert themselves into banks.

Considering all these points and some other relevant conditions, the RBI has said that those entities or groups which wish to apply for a banking license can submit their application on or before July 1, 2013. In order to ensure transparency, the RBI would come out with a list of groups that have applied for the license after the last date of receipt of applications (July 1, 2013).

Post the submission of applications, all of them would be viewed by a high-level advisory committee which would submit their recommendations to the RBI. The final decision would then be taken by the RBI, which would then issue the new banking licenses. We believe that this would at least take 6-8 months (after the submission of applications) and the new licenses may be given in CY2014.

As per media reports, companies like Mahindra and Mahindra Financial Services (MMFS), IDFC, L&T Finance Holdings, Shriram Transport Finance, Reliance Capital and Tata Capital are among the probable candidates to apply for the license.

All in all, with the government on the fast track with the reforms process, this move does not come as much of a surprise. However, the momentum should be continued and the process should be carried through effectively and in a timely manner. While there would be stiff competition, the growth prospects for existing as well as new banks are robust as there is still significant untapped opportunity in banking. Watch this space for updates in this regard.

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