The Reserve Bank of India (RBI) today issued the much-awaited guidelines for new bank licences, allowing corporates and public sector entities with sound credentials and a minimum track record of 10 years to enter the banking business.
The Reserve Bank, which has laid down an elaborate 'fit and proper' criteria, has not excluded any category like brokerages, real estate companies from entering into the banking space as has been advocated by the Finance Ministry.
The final guidelines pave the way for corporate houses like Anil Dhirubhai Ambani Group, Larsen & Toubro, Tatas, Mahindra and Mahindra, Life Insurance Corporation and Aditya Birla Group to enter the banking business.
"Entities/groups should have a past record of sound credentials and integrity, be financially sound with a successful track record of 10 years," it said.
The minimum paid-up capital for setting up a bank has been pegged at Rs 500 crore.The cap on the foreign investment, including FDI/FII and NRI, has been set at 49 per cent.
As per norms notified by RBI, on receipt of licence, promoter has to start operations within one year and list the company within three years of commencement of the business.
Also, new banks should open at least 25 per cent of branches in unbanked rural centres.
Those seeking to set up a bank would have to submit applications by July 1, 2013. The RBI will display names of applicants on its Website.
Before granting licences, RBI would seek feedback about applicants from other regulators, enforcement, investigative agencies like I-T Department, CBI, ED, as deemed appropriate.
The rules issued today is the culmination of three-year process. RBI will now begins taking applications for bank licenses for the first time in a decade.
At present, there are 26 public sector banks and 22 private sector banks. Only 35 per cent of India's adult population has accounts with banks and other financial institutions as compared to a global average of 50 per cent.
It is 41 per cent in case of developing economies.
Following the grant of licence, the promoter group, which could be a public sector entity as well, will be required to set up a wholly-owned Non-Operative Financial Holding Company (NOFHC).
The NOFHC is aimed at protecting the banking operation from extraneous factors like other business of the Group i.e., commercial, industrial and financial activities not regulated by financial sector regulators.
To ally fears of conflict of interest that may arise if a corporate entity opens up a bank, the notification said: "The RBI will have to be satisfied that the corporate structure does not impede the financial services entities held by the NOFHC from being ring-fenced, that it would be able to supervise the bank, the NOFHC, and its subsidiaries/joint ventures/associates on a consolidated basis...."
Existing non-banking financial company (NBFC) will be eligible to apply for a bank licence.
If considered eligible, NBFCs may be permitted to promote a new bank or convert themselves into banks, it said.
According to norms, the business plan has to be realistic and viable and should address how the bank proposes to achieve financial inclusion.
The new entity will have to comply with the priority sector lending targets and sub-targets as applicable to the existing domestic banks, it said.
Banks promoted by groups having 40 per cent or more 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.
The guidelines said the NOFHC will hold the bank as well as all the other financial services entities of the group regulated by RBI or other financial sector regulators.
"The general principle is that no financial services entity held by the NOFHC would be allowed to engage in any activity that a bank is permitted to undertake departmentally," it said.
Commenting on the norms KPMG Partner and head of financial Services Tax Naresh Makhijani said the guidelines are now complete in all respects. RBI is eying entities with deep pockets, impeccable track record and financial inclusion in mind.
According to RBI norms, the NOFHC will 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 holding company will 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.
"The NOFHC and the bank shall not have any exposure to the promoter group. The bank shall not invest in the equity or debt capital instruments of any financial entities held by the NOFHC," RBI said.
With regard to corporate governance, the new guidelines said at least 50 per cent of 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, it said.
As regards procedure for grant of bank licence, RBI said applications will be screened by the central bank itself before being forwarded to the high level advisory committee for further scrutiny.
The Committee, to be constituted shortly by the RBI, will submit its recommendations to the Reserve Bank. The decision to issue an in-principle approval for setting up of a bank will be taken by the central bank.
New bank licences expected by FY'14 end: Finance Ministry
The Finance Ministry today said it hopes that the Reserve Bank will be able to issue licences for new private sector banks by the end of 2013-14 fiscal.
RBI today issued guidelines for corporates, both in private and public sectors as well as NBFCs, to foray into the banking space. The Last date for applying for a new bank licence is July 1.
"There would be examination of applications (by RBI and a high powered committee). I think with all going well, with all clearances, by end of the financial year (2013-14) we will see some success," Financial Services Secretary Rajiv Takru told reporters here.
He said the RBI guidelines aim to "ensure that only responsible people enter the (banking) space".
When asked if public sector entities hold edge over private corporates, the Secretary said there will be a level playing field and RBI would not show favour to any entity.
"It is a level playing field. Whoever is eligible will get (licence). I don't think the RBI is going to play any favourites, and we have no intention of any favourites being played," he said.
On issues of clearances from Income Tax, CBI and ED and also other regulators, Takru said these conditions are aimed at ensuring safety of the deposits of customers.
'Final norms for new banks will help expand banking services'
Hailing the final norms for issue of licences to new banks in private sector, Assocham today said this will help in expanding the banking services.
"It will not only help in expanding banking services but would also bring in healthy competition," Assocham President Rajkumar Dhoot said.
Also, the provisions regarding permitting existing non-banking financial companies (NBFCs) to convert into banks will also meet the demand of NBFCs sector, he added.
The Reserve Bank today released the final guidelines for issuing of new banking licences, allowing entities in the private and the public sector as well as non-banking financial companies to enter the fray.
Assocham said the corporate governance requiring at least 50 per cent of directors of the non-operative financial holding company (NOFHC) is also a major step which will create more transparency and infuse adequate oversight on the functioning of the new banks.
The RBI, which allowed private banks in 1993, had issued the last set of licences in 2001 to two entities-- Kotak Mahindra Bank and Yes Bank.
Following are the highlights of the Reserve Bank's guidelines for licensing of new banks in the private sector:
* Corporates, PSUs and NBFCs can set up a bank
* No bar on entities in sectors like brokerage, realty
* Minimum paid-up equity capital to be Rs 500 crore
* New banks to get listed within 3 years of business
* Foreign shareholding limited to 49% for first 5 years
* RBI to seek feedback on applicants' background from other regulators, Income Tax, CBI and ED
* Licence seeker should have 10 years of successful financial track record, sound credentials and integrity
* To comply with priority sector lending targets; open at least 25 per cent branches in unbanked rural areas
* Boards to have majority of independent directors
* Business plan should be realistic, viable and address financial inclusion
* Applications will be screened by RBI and referred to a high level advisory committee
* To ensure transparency, names of applicants will be placed on RBI's website
* Last date for applying for the licence is July 1
* Over the last two decades, RBI licensed 12 banks in private sector
* New banks were proposed in Budget speech for 2010-11
* RBI floated first discussion paper in August 2010.