Minimum capital of Rs 500 crore stipulated

New norms to float private banks: Sound credentials, integrity & successful track record

Minimum capital of Rs 500 crore stipulated

New banks will be allowed to set up only through a wholly owned Non-Operative Holding Company (NOHC) to be registered with the RBI as a non-banking finance company, said the draft guidelines posted on RBI website titled “Licensing of New Banks in the Private Sector.”

The draft said NOHC should hold minimum 40 per cent of the paid-up capital of the bank for a period of five years from the date of licensing of the bank. Shareholding by NOHC in excess of 40 per cent should be brought down to 20 per cent within 10 years and to 15 per cent within 12 years from the date of licensing of the bank.

On expected lines

“After a lot of discussion, the RBI has set out the norms which are certainly positive, said Vijaya Bank Chairman and Managing Director H S Upendra Kamath while commenting on the RBI norms. “To make sure that only serious players apply for banking licence the minimum capital requirement has been kept at Rs 500 crore. The stipulation that promoters will have hold at least 40 per cent of the equity for five years will also bring in only the committed players.”

The RBI also said that foreign shareholding (or the aggregate non-resident shareholding) in the new bank shall not exceed 49 per cent for the first 5 years after which it will be as per the extant policy.

It is a common knowledge that many of the business groups like Tatas, Anil Ambani-led Reliance, Aditya Birla Group and Chennai-based Shriram Group and Development Bank of Singapore (DBS) have evinced their interest to make a foray into the banking sector and they were waiting for RBI to announce the new guidelines to make a further move.  In this context, DBS CEO Piyush Gupta had stated: “If those guidelines come through, then we will get the opportunity to start branching out in India exactly like any of the national banks....then yes we will go back and reconsider the scale and size of the footprint that we would wish to create.” 

Among other things, RBI said the business model of a new bank should be realistic and viable and it should address how the bank proposes to achieve financial inclusion.  In terms of corporate governance, at least 50 per cent of the directors of the NOHC should be independent directors. The corporate structure should be such that it does not impede effective supervision of the bank and the NOHC on a consolidated basis by the Reserve Bank.

Only serious players

Eligible promoters (entities or groups) in the private sector should have sound credentials and integrity should be having successful track record of at least 10 years to promote banks. RBI also made it clear that realty companies and broking firms will not be allowed to float new banks. It said, “entities or groups having significant (10 per cent or more) income or assets or both from real estate construction or broking activities or both,  individually or taken together in the last three years will not be eligible.”

While seeking comments from banks, NBFCs, industrial houses, other institutions and the public at large, RBI said the final guidelines will be issued and the process of inviting applications for setting up of new banks in the private sector will be initiated only after receiving feedback, comments and suggestions on the draft guidelines.
To make sure a bank does not exessively fund its promoters’ business, the RBI said the exposure of bank to the promoter group shall not exceed 10 per cent and total 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 bank should get its shares listed on the stock exchanges within two years of licensing.

New banks should open at least 25 per cent of its branches in unbanked rural centres (population upto 9,999 as per 2001 census), while existing NBFCs, if considered eligible, may be permitted to either promote a new bank or convert themselves into banks.

Highlights of new norms

Eligible promoters: Entities / groups in the private sector, owned and controlled by residents, with diversified ownership, sound credentials and integrity and having successful track record of at least 10 years will be eligible to promote banks. But entities / groups having 10 per cent or more income or assets from real estate construction and / or broking activities in the last three years will not be eligible.

Corporate structure: New banks will be set up only through a wholly owned Non-Operative Holding Company (NOHC) to be registered with the RBI as a non-banking finance company (NBFC)

Foreign shareholding: The aggregate non-resident shareholding in the new bank shall not exceed 49 per cent for the first 5 years after which it will be as per the extant policy.

Minimum capital requirement: Minimum capital requirement will be Rs 500 crore but actual capital will depend on the business plan of the promoters.

Promoter company shall hold minimum 40 per cent of the paid-up capital of the bank for a period of five years from the date of licensing of the bank. Such shareholding in excess of 40 per cent shall be brought down to 20 per cent within 10 years and to 15 per cent within 12 years.

Corporate governance: At least 50 per cent of the directors of the promoting company should be independent directors.

Business model: Banks should be realistic and viable and should address how the bank proposes to achieve financial
inclusion.

Promoter exposure:  The exposure of bank 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.
Listing: The bank shall get its shares listed on the stock exchanges within two years of licensing.

Network: At least 25 per cent of its branches should be in unbanked rural centres .
NBFCs: Existing NBFCs, if considered eligible, may be permitted to either promote a new bank or convert themselves into banks.

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