Guidelines for Licensing of New Banks

The RBI on February 22, 2013 released the Guidelines for ‘Licensing of New Banks in the Private Sector’. Key features of the guidelines are:

(i) Eligible Promoters: A private sector/public sector/NBFCs/entity/group eligible to set up a bank through a wholly-owned “Non-Operative Financial Holding Company (NOFHC)”.

(ii) ‘Fit and Proper’ criteria: A past record of sound credentials, integrity and sound financial background with a successful track record of 10 years will be required.

(iii) Corporate structure of the NOFHC: The NOFHC to be wholly owned by the promoter/promoter group which shall hold the bank as well as all the other financial services entities of the group.

(iv) Minimum voting equity capital requirements for banks and shareholding by NOFHC: The initial minimum paid-up voting equity capital56 for a bank shall be Rs. 5 billion. The NOFHC shall initially hold a minimum of 40 per cent of the paid-up voting equity capital of the bank which shall be locked in for a period of five years and which shall be brought down to 15 per cent within 12 years. Bank’s shares to be listed on the stock exchanges within three years of the business commencement.

(v) Regulatory framework: The bank to be regulated by the relevant Acts/Statutes/Directives, issued by the RBI and other regulators. The NOFHC shall be registered as an NBFC with the RBI and will be

governed by a separate set of directions issued by the RBI.

(vi) Foreign shareholding in the bank: Foreign shareholding upto 49 per cent for the first 5 years after which it will be as per the extant policy.

(vii) Corporate governance of NOFHC: At least 50 per cent of the Directors of the NOFHC should be independent directors. The corporate structure should not impede effective supervision of the bank and the NOFHC by RBI.

(viii) Prudential norms for the NOFHC: The prudential norms will be applied to NOFHC on similar lines as that of the bank.

(ix) Exposure norms: The Bank/NOFHC allowed no exposure to the Promoter Group—the bank shall not invest in the equity/debt capital instruments of any financial entities held by the NOFHC.

(x) Business Plan for the bank: The business plan should be realistic and viable and should address how the bank proposes to achieve financial inclusion.

(xi) Additional conditions for NBFCs promoting/converting into a bank: Existing NBFCs, if considered eligible, may be permitted to promote a new bank or convert themselves into banks.

(xii) Other conditions for the bank:

(a) To open at least 25 per cent of its branches in un-banked rural centres (with population of upto 9,999 as per the latest census).

(b) To comply with the priority sector lending targets applicable to the existing domestic banks.

(c) Banks promoted by groups having 40 per cent or more assets/income from non-financial business will require RBI’s prior approval for raising paid-up voting equity capital beyond Rs. 10 billion.

(d) Any non-compliance of terms and conditions will attract penal measures including cancellation of licence of the bank.

Two new banks get licence: The RBI by early April, 2014 granted ‘in- principle’ approval to two applicants, IDFC Limited and Bandhan Financial Services Private Limited, to set up banks—‘in-principle’ approval granted will be valid for 18 months during which the applicants have to comply with

the requirements and fulfil other conditions. Both are leading non-banking finance companies, while IDFC deals in infrastructure finance, Bandhan is in microfinance business.

A High Level Advisory Committee headed by former RBI Governor Bimal Jalan recommended these two applicants out of a list of 25 applications. The case of India post will be decided by the RBI in consultation with the Government of India. The RBI also announced to work on giving licences more regularly, that is virtually ‘on-tap’. As per the RBI, those applicants who have been denied licences can apply for the ‘differentiated licences’ (once RBI invites applications for it)—some of them may be better off applying for a differentiated licence rather than for a full licence. The so- called differentiated banks will be specialised institutions such as the ‘payment banks’ suggested by an RBI panel (headed by Nachiket Mor) on financial inclusion, to widen the spread of payment services and deposit products to small businesses and low-income households.