The much awaited final guidelines for licensing of New Banks in the Private Sector is released by the Reserve Bank of India (‘RBI’) today i.e., 22 February 2013.
The RBI had released a Discussion Paper on 11 August 2010 and thereafter, the draft guidelines on the licensing of new banks were released on 29 August 2011 by RBI. The guidelines have been finalised taking into account feedback from stakeholders, the media and the important amendments in December 2012 to the Banking Regulation Act, 1949.
We have summarised the key highlights of the final guidelines.
Executive Summary
The final guidelines lay down criteria with respect to Promoter eligibility, corporate structure, foreign shareholding, corporate governance, prudential and exposure norms; both on a stand-alone and a consolidated basis. The applicants will have to prepare a detailed project report and a business plan giving details, amongst other things, of how the applicant proposes to achieve financial inclusion.
There have been certain amendments vis-à-vis the draft guidelines including amendments to promoter credentials. The express restriction on groups engaged in activities such as real estate and capital markets including broking has been replaced by an ‘in-principle’ restriction on activities which are speculative in nature or subject to
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Licensing of New Banks in the Private Sector
22 February 2013
high asset price volatility. Further, NOFHCs have also been permitted to leverage (subject to prescribed limits), which was not permitted in the draft guidelines.
Key highlights of the guidelines are as follows:
Eligible Promoters
The following entities / groups shall be eligible to promote a bank through a wholly-owned Non-Operative Financial Holding Company (‘NOFHC’)
o Private sector entities that are ‘owned and controlled by residents;
o Public sector entities.
Promoters / Promoter Groups with an existing NBFC will also be eligible.
The terms ‘Promoter’ and ‘Promoter Group’ have been defined exhaustively in the guidelines.
‘Fit and Proper’ criteria
Entities / groups should have a past record of sound credentials and integrity, be financially sound with a successful track record of running their business for at least 10 years.
Feedback may be sought from other regulators, and enforcement and investigative agencies like Income Tax, CBI, Enforcement Directorate, etc.
Corporate structure
NOFHC to be the chosen mode of operation
Shareholding by promoters and/or relatives and/or entities in which promoters/relatives holds greater than 50% shares is capped at 10%
Group companies in which public hold not less than 51% should hold 51%
or more share capital
NOFHC should hold all regulated financial entities of the group (in which the group has significant influence1or control)
An activity that can be undertaken departmentally by the bank should be undertaken by the bank itself
Certain activities2are required to be conducted through a Joint Venture/
Subsidiary/ Associate which will be held by the NOFHC
Corporate structure should not impede ring fencing of the financial services entities held by the NOFHC
Entities held by NOFHC should be regulated by respective regulators
NOFHC should not be permitted to set up new financial services entity for three years, except where subsidiary/JV/associate of bank is legally required or permitted by RBI
1As defined in Accounting Standard 23
2Specialized activates like Insurance, Mutual Fund, Stock Broking, Infrastructure Debt Fund, etc.
Shares of the NOFHC shall not be transferred to any entity outside the promoter group, any change in shareholding in excess of 5% should be subject to RBI approval
Regulatory framework
NOFHC should be registered as NBFC with RBI and will be governed by a separate set of directions issued by RBI
The financial entities held by NOFHC will be regulated by respective financial sector regulators
Capital requirements
Minimum capital of 5 billion Indian rupees
40% of the paid up capital should be held by NOFHC which shall be locked in for five years
If further equity capital is raised within five years, NOFHC should continue to hold 40%
Shareholding in excess of 40% should be brought down to 40% within three years, to 20% within 10 years and to 15% within 12 years
Bank should maintain a minimum capital adequacy ratio of 13% for at least three years, subject to upward revision by RBI
On a consolidated basis, NOFHC should maintain a minimum capital adequacy ratio of 13% for at least three years
To be publicly listed within three years
Foreign Shareholding
Aggregate foreign shareholding should not exceed 49% for first five years, after which it will be as per the extant policy
For the first five years, no non resident, directly or indirectly should hold more than 5% of voting equity
Prudential Norms
Should be applied both on stand-alone as well as consolidated basis
25% of the profits should be transferred to reserve fund each year3
Leverage up to 1.253times of its paid up equity and free reserves is permitted
NOFHC to adhere to Basel II/III4norms as promulgated by RBI
3Compliance on a standalone basis
4Compliance on Consolidated basis
Exposure Norms
Particulars Within Promoter Group Outside Promoter Group Investment Credit Investment Credit Stand Alone
NOFHC
Only to entities under it
Only to entities under it
Prohibited Prohibited
Consolidated NOFHC
N.A N.A Restricted to
10% of consolidated capital
As per exposure norms
Bank Prohibited Prohibited Subject to
prescribed rules
As per exposure norms Residual
Financial entities under NOFHC
Prohibited Prohibited Equity
instruments of other NOFHCs prohibited
Not expressly prescribed in the final guidelines
Others
Arms length relation with Promoter Group
Greater than 5% holding in the bank subject to approval by RBI
Greater than 10% holding in the bank other than by the NOFHC forbidden, directly or indirectly
25% of new branches in unbanked rural areas with a population of less than 9999 as per the latest census
If greater than 40% of promoter group income/assets from non financial business, RBI approval required for raising voting equity capital beyond 10 billion Indian rupees for every block of 5 billion Indian rupees
In case of NBFC conversion/setting up bank, permission to convert existing branches of NBFC to be granted only in tier 2-6 cities. Tier 1 conversion subject to RBI approval.
Way forward
The RBI has invited applications by 1 July 2013. Post initial screening by the RBI, the applications will be referred to a High Level Advisory Committee, which will comprise of eminent persons with experience in banking, financial sector and other relevant areas.
This Committee will submit recommendations to RBI and RBI will take a final decision on grant of in-principle approval to aspirants. Amongst other things, the RBI will consider applicants who have an impeccable track record and entities which are likely to adhere to best standards of customer service and efficiency. The in-principle approval will be valid for a period of one year; and may be withdrawn by the RBI if any adverse features are noticed within the Promoters or Promoter Group.
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