New Banking Licenses In India: The Way Forward

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On 22 February 2013, the Reserve Bank of India (RBI) issued its guidelines for licensing of new banks in the private sector (the Guidelines). The Guidelines had sought applications for new banking licenses to be submitted to the RBI before 1 July 2013.

After the deadline of 1 July 2013 had passed, the RBI announced that a total of 26 applicants had expressed interest in the new banking licenses. The applicants for these banking licenses were from diverse backgrounds. Applicants ranged from non-banking financial companies (NBFCs), corporate houses, microfinance institutions and government entities.

The number of applicants has been fewer than the market had anticipated. The high barriers to entry and the regulatory requirements imposed by the Guidelines may have discouraged a larger number of aspirants from seeking a banking license.

Requirements under the Guidelines

Eligible Promoters: Entities/groups (a) in the private sector that are ‘owned and controlled by residents’, (b) in the public sector and (c) with an existing NBFC, are entitled to promote a bank through a wholly-owned Non-Oper¬ative Financial Holding Company (NOFHC), which is to be registered with the RBI as an NBFC.

"Fit and Proper": Promoters/promoter groups should be "fit and proper" in order to be eligible to promote banks through a wholly owned NOFHC. The test of "fit and proper" includes inter alia, sound financial credentials, successful track record of running their business for at least 10 years and there being no apparent risk to the new bank as a result of the nature of the promoter's business or business model.

Corporate Structure of the NOFHC: Shareholding in the NOFHC is required to be limited to non-financial services companies and individuals belonging to the promoter groups and which may not be transferred to any entity/person outside the promoter group. Individuals and other entities (in which the promoter and/or his relatives hold not less than 50% of the eq¬uity share capital) are not entitled to hold more than 10% of the total voting share capital of the NOFHC. RBI approval is required for any change in shareholding (by the promoter group) within the NOFHC as a result of which a shareholder acquires 5% or more of the voting share capital of the NOFHC. The NOFHC is set up to ring-fence the bank and other regulated financial services companies from the oth¬er activities of the promoter group.

Minimum Capital Requirement: The minimum paid-up voting capital for a bank is Rs. 500,00,00,000. The NOFHC is re¬quired to hold a minimum of 40% of the paid-up voting share capital of a bank for a period of five (5) years from the date of commencement of business by the bank. Within a period of three (3) years from the date of commencement of business, the bank is required to get its shares listed on a recognized stock exchange in India.

Foreign shareholding: The aggregate non-resident shareholding in the new bank shall not exceed 49% and a non-resident shall not hold more than 5% of the paid-up voting share capital of the bank for the first five (5) years, after which it will be as per the extant policy of the RBI.

Corporate governance: The ownership and manage¬ment is required to be separate and distinct in the NOFHC, the bank and other entities regulated by RBI. The Guidelines prescribe the qualifications and requirements for the directors of the NOFHC which, inter alia, require at least 50% of such directors to be independent of the promoter group entities and their major customers and major suppliers.

Prudential and exposure norms: The NOFHC is re¬quired to comply with prudential and exposure norms applicable on a standalone and consolidated basis. The Guidelines also provide for exposure norms for the bank and other financial entities held by NOFHC.

Shareholding Restrictions: No entity other than the NOFHC is entitled to have shareholding or control in excess of 10% of the paid-up voting share capital of the new bank. Acquisition of shares which results in the aggregate holding of any person being 5% or more of the paid up voting share capital of the new bank requires prior approval of the RBI.

Additional conditions: The new bank is re¬quired to open at least 25% of its branches in unbanked rural centers. Banks promoted by promoter groups having 40% or more assets or income from non-financial business is required to have RBI’s prior approval for raising paid-up voting share capital in excess of Rs. 1000,00,00,000 for every block of Rs. 500,00,00,000.

Comments

Whilst the initiative by the RBI to allow new entrants into the banking sector will foster greater competition, reduce costs and improve the overall quality of service to the end customer, the stringent requirements for grant of these licenses are bound to add pressures to the competitiveness and profitability of the new banks.

In any event, since a large segment of the population still does not have access to basic banking facilities, it would be an opportunity for an applicant with the right resources to capitalise on this opportunity.

Guidelines for Licensing of New Banks in the Private Sector

Clarifications to Queries on Guidelines for Licensing of New Banks in the Private Sector