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RBI draft note bars large business houses from setting up new banks

05 May, 2016

The Reserve Bank of India on Thursday issued draft norms for giving universal bank licences as and when it gets an application that meets all the conditions, as part of efforts to expand the reach of banking services.

The draft guidelines for giving licences ‘on tap’ explicitly bar large industrial or business houses from setting up new banks but allow them to take up to 10% stake in the lenders. Private sector groups ‘owned and controlled by residents’ can only apply for a licence if such groups have total assets of at least Rs 5,000 crore and their non-financial business doesn’t account for more than 40% in terms of assets or gross income. This is a departure from the central bank’s 2013 guidelines that said any entity in the private sector could seek a licence.

The RBI has so far been conservative in opening up the banking sector and has been issuing bank licences once every few years. It last issued bank licences in 2014 to microfinance firm Bandhan and financial services firm IDFC. At the time, almost two dozen companies–many of them from large business houses–had applied for a licence. These two licences were given out a decade after YES Bank got approval to start operations.

RBI governor Raghuram Rajan, however, has been seeking to widen the reach of banks in a country where a large part of the population doesn’t have access to banking services despite the presence of almost 50 state-run and private-sector commercial lenders. Besides issuing licences to Bandhan and IDFC, Rajan has also created two new categories of lenders—small finance banks and payment banks—and has given final or in-principle approval to about 20 companies to set up such banks.

The new draft guidelines, which come at a time when Indian banks are struggling under the growing weight of bad loans, mean that many of the companies that applied for a licence in 2013 will not be eligible now. These could include L&T Finance, part of the engineering giant Larsen & Toubro; and Aditya Birla Nuvo, part of the telecom-to-metals conglomerate Aditya Birla Group. However, many non-banking finance companies which had applied previously can try again.

The norms said that resident individuals and professionals with 10 years of experience in banking and finance are eligible to promote banks. This could mean that banking professionals such as former Citibank CEO Vikram Pandit can apply for a licence. Pandit had in 2014 invested Rs 525 crore in the real estate lending arm of JM Financial, one of the applicants for a bank licence in 2013.

Among other measures, the draft norms suggest an initial minimum paid-up voting equity capital for a bank to be Rs 500 crore. Thereafter, the bank shall have a minimum net worth of Rs 500 crore at all times, it said.

Also, it will not be mandatory to have a non-operative financial holding company structure in case the bank promoters are individuals or standalone entities. Promoters that have other group entities will have to set up the bank only through such a holding company, it said.

The promoters will have to hold at least 40% of the bank’s equity capital for a minimum of five years from the date the lender starts business. The promoter group shareholding shall be brought down to 15% within 12 years, it added.

The draft norms also suggest that new banks will have to list on the stock exchanges within six years of starting operations.

To expand the reach of banking services, the norms recommend that the new banks should open at least 25% of their branches in unbanked rural centres with a population of up to 9,999.

The central bank has sought comments on the draft guidelines by June 30. Read the full draft here

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RBI draft note bars large business houses from setting up new banks

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