RBI issues guidelines for licensing of new banks in private sector

The Reserve Bank of India (RBI) released the final guidelines for issuing new bank licences on Friday, paving the way for corporate houses to enter the banking sector.

The RBI said it will allow applications for new bank licences until July 1, 2013. The statement did not exclude companies from any specific industry from applying for a new bank licence.

In the draft rules issued in 2011, the central bank had excluded companies in the property and brokerage industries from applying for new bank licences.

The RBI will screen applications, and the applications will be referred to a high-level committee for recommendations. The central bank will then issue an in-principle approval to set up the bank and its decision will be final.

Although the document does not mention how many licences will be issued, Finance Ministry sources told NDTV Profit that the central bank is likely to issue four to five licences and the process is expected to be completed by the end of this calendar year.

Non-banking financial companies like Bajaj, Tata, Shriram Transport, Religare, SREI, and Reliance Capital have shown interest in the banking sector.

Sunil Godhwani, chairman and managing director at Religare Enterprises, said: "We welcome the final guidelines from the RBI. Banking is a logical extension of Religare's diverse India financial services platform, and we will certainly apply for a license. We are studying the guidelines and will take appropriate steps to apply for the license accordingly."

India currently has 26 public sector banks, 22 private sector banks and over 40 foreign banks.

The RBI, which allowed private banks in 1993, had issued the last set of licences in 2001 to two applicants - Kotak Mahindra Bank and Yes Bank.   No new Indian bank has been formed since Yes Bank in 2004.

"We welcome the new banking guidelines; they are forward looking and Reliance Capital will be interested in applying for a banking licence," Sam Ghosh, CEO at Reliance Capital, said.

The key features of the guidelines are:

1. Eligible promoters: Entities/groups in the private sector, entities in public sector and non-banking financial companies (NBFCs) shall be eligible to set up a bank through a wholly-owned non-operative financial holding company (NOFHC).

2. 'Fit and proper' criteria: Entities/groups should have a past record of sound credentials and integrity, be financially sound with a successful track record of 10 years. For this purpose, the RBI may seek feedback from other regulators and enforcement and investigative agencies.

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

4. Minimum voting equity capital requirements for banks and shareholding by NOFHC: The initial minimum paid-up voting equity capital 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. The bank shall get its shares listed on the stock exchanges within three years of the commencement of business by the bank.

5. Regulatory framework: The bank will be governed by the provisions of the relevant Acts, relevant Statutes and the Directives, Prudential regulations and other Guidelines/Instructions issued by RBI and other regulators. The NOFHC shall be registered as a non-banking finance company (NBFC) with the RBI and will be governed by a separate set of directions issued by RBI.

6. Foreign shareholding in the bank: The aggregate non-resident shareholding in the new bank shall not exceed 49 per cent for the first 5 years after which it will be as per the extant policy.

7. 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 on a consolidated basis by RBI.

8. Prudential norms for the NOFHC: The prudential norms will be applied to NOFHC both on stand-alone as well as on a consolidated basis and the norms would be on similar lines as that of the bank.

9. Exposure norms: The NOFHC and the bank shall not have any exposure to the promoter group. The bank shall not invest in the equity/debt capital instruments of any financial entities held by the NOFHC.

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

11. Other conditions for the bank:

a. The board of the bank should have a majority of independent directors.

b. The bank shall open at least 25 per cent of its branches in unbanked rural centres (population up to 9,999 as per the latest census)

c. The bank shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic banks.

d. 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 (Rs 1,000 crore) for every block of Rs 5 billion (Rs 500 crore).

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

12. 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.

With inputs from Reuters and PTI

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