RBI acknowledged the need for having an explicit policy on granting banking licences in India. They reviewed the current stop and go based licensing policy and are now considering a ‘continuous authorisation’ policy to increase the level of competition and bring in new ideas into the system. The Reserve Bank of India has now framed guidelines for granting licences for universal banks on a continuous basis. They are trying to reduce entry barrier for new banks. Guidelines are as follows:
Indian residents promoted NBFCs having a successful track record for at least 10 years will be eligible to convert into a bank or promote a new bank. Singly or jointly, Indian resident individuals or professionals having 10 years of experience in banking and finance can float a bank.
Private sector entities with a 10 year successful track record with an asset base of Rs 50 billion, if the non-financial business of the group does not account for 40 % or more in terms of total assets or in terms of gross income, will be eligible for promoting a bank.
It is mandatory to float a Non-Operative Financial Holding Company (NOFHC) for entities within a group . In case the proposal is for setting up or conversion into a bank, any change in a 5% shareholding within the promoting or converting entity, from the date of application to the RBI, shall be with the prior approval of RBI.
The structure of NOFHC and its Activities
The NOFHC needs to be registered with the RBI as a non-banking financial company (NBFC). The Promoter or Promoter Group should hold not less than 51 per cent of the total paid-up equity capital of the NOFHC.
The NOFHC holds the bank and all the other financial services entities of the Group regulated by RBI or other financial sector regulators to separate the bank from other activities of the Group such as commercial, and financial activities not regulated by financial sector regulators.
The NOHC will hold only those regulated financial sector entities in which the individual Promoter or group have significant influence or control.
RBI also suggests certain specialised activities, such as, insurance, mutual funds, stock broking, infrastructure debt funds, etc. to be conducted through a separate Subsidiary or Joint Venture or Associate structure. Activities such as credit cards, primary dealers, leasing, hire purchase, factoring, the bank can conduct from within the bank or through a separate outside structure.
Shareholding and Minimum Capital Requirement
Individuals and companies, directly or indirectly connected with large industrial houses are permitted to hold a maximum 10% equity of the new private sector bank and not have controlling interest in the bank. Such shareholders are not permitted to have any Director on the Board of the bank on account of shareholder agreements or otherwise. The limit of less than 10% would apply to individuals and all inter-connected companies belonging to the concerned large industrial houses on an aggregate basis.
The initial minimum paid-up voting equity capital for the new bank should be Rs 5 billion. The new bank would be required to have a minimum net worth of Rs 5 billion at all times. The promoters or NOHFC is required to hold a minimum of 40% of the paid-up voting equity capital of the bank which shall be locked-in for a period of five years from the date of commencement of business of the bank.
The promoter group shareholding shall be brought down to 15% within a period of 12 years from the date of commencement of business of the bank. The foreign shareholding in the bank is subject to the minimum promoter shareholding requirement and at present, the aggregate foreign investment limit is 74%. The board of the bank should have a majority of independent directors.
The bank would be required to list its shares on the stock exchanges within six years of the commencement of business by the bank.
The bank would need to open at least 25% of its branches in untapped rural centres (population up to 9,999 as per the latest census). The bank would need to comply with the priority sector lending targets and sub-targets as applicable to the existing domestic scheduled commercial banks.