The Reserve Bank of India (RBI) on Friday released final guidelines for issuing new bank licences, laying the ground open for financial firms and corporate houses to enter the banking sector. The guidelines are largely in line with the draft norms issued in 2011, but has three critical changes.
It has decided to scrap an implicit ban on real estate developers and stock brokers from applying for a banking licence, extended the time period for new banks to go public from two years to three years and put strict no exposure norms in group firms.
In draft rules issued in 2011, the RBI had said that entities or groups having over 10 per cent income or assets or both from real estate construction or broking activities individually in the last three years will not be eligible.
The discussion for a new set of private sector banks, which was mooted in 2010, has come after intense deliberation between the central bank and the Ministry of Finance, in which the RBI wanted the companies with higher exposure to real estate player and brokerage kept out of the fray because of its speculative business fundamentals.
There are no such eligibility restrictions in the final guidelines.
However, in the final guidelines, it has tightened the norms for lending/investment exposure to group firms.
The draft norms had said exposure of banks to any entity in the promoter group shall not exceed 10 per cent and the aggregate exposure to all the entities in the group shall not exceed 20 per cent of the paid-up capital and reserves of the bank.
The final guidelines says: “The holding company and the bank shall not have any exposure to the promoter group. No investments in the equity or debt capital instruments of any financial entities held by the holding company.”
This would make it difficult for large conglomerates like Tatas to meet the norm given the huge spread of their business across sectors.
In another change from the proposed rules, RBI has allowed new banks to get its shares listed on the stock exchanges within three years of the commencement of business. The draft norms had said the bank shall get its shares listed on the stock exchanges within two years of licensing.
According to experts, the guidelines have addressed key issues relating to corporate governance and provides a level-playing field. For example, in areas like financial inclusion, the new bank needs to comply with the priority sector lending targets and sub-targets as applicable to the existing domestic banks.
PE-backed Religare is one of the many contenders for the new banking licence. Sunil Godhwani, Chairman and Managing Director, Religare Enterprises Limited 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 licence. We are studying the guidelines and will take appropriate steps to apply for the license accordingly.”
The central bank said eligible promoters can apply for setting up of new banks on or before July 1, 2013. In order to ensure transparency, the names of the applicants will be placed on the RBI website after the last date of receipt of applications.
At the first stage, the applications will be screened by the RBI and thereafter, the applications will be referred to a High Level Advisory Committee, the constitution of which will be announced shortly.
The committee will submit its recommendations to the RBI. The decision to issue an in-principle approval for setting up of a bank will be taken by the central bank. The validity of the in-principle approval issued by the Reserve Bank will be one year.
Other Key Guidelines (for full guidelines click here):
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).
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, RBI may seek feedback from other regulators and enforcement and investigative agencies.
The NOFHC shall be wholly owned by the promoter/promoter group and shall hold the bank as well as all the other financial services entities of the group.
The initial minimum paid-up voting equity capital for a bank shall be Rs 500 crore. 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 NOFHC shall be registered as a NBFC with the RBI and will be governed by a separate set of directions issued by RBI.
The aggregate non-resident shareholding in the new bank shall not exceed 49 per cent for the first five years after which it will be as per the extant policy.
At least 50 per cent of the directors of the NOFHC should be independent directors.
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.
The business plan should be realistic and viable and should address how the bank proposes to achieve financial inclusion.
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).
The bank shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic banks.
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 1,000 crore for every block of Rs 500 crore.
Any non-compliance of terms and conditions will attract penal measures including cancellation of licence of the bank.
Existing NBFCs, if considered eligible, may be permitted to promote a new bank or convert themselves into banks.
(Edited by Prem Udayabhanu)