The Reserve Bank of India (RBI) on 2 April 2014 granted in-principle approvals to IDFC Ltd and Bandhan Financial Services Pvt. Ltd to start new banks in India. These approvals have been granted under the guidelines on licensing of new banks in the private sector. The two have been granted the permission to set-up banks from a field of 25 aspirants.
The two applicants received the in-principle approval following the recommendation of High-Level Advisory Committee (HLAC) set up by RBI that claimed these two as suitable. The approvals would be valid for a period of 18 months and within this period these firms will have to comply with the rules stipulated by the RBI.
RBI in its statement said that the HLAC had also recommended that in the case of Department of Posts, which has applied for licence, it would be desirable to consider the application separately in consultation with the Government of India.
The two entities, Bandhan based in Kolkata and IDFC based in Mumbai that has received the approvals are non-banking finance companies. Bandhan is a microfinance institution and IDFC is classified as an infrastructure finance company.
Since 2004, these two entities became the first one to be issued new bank licence. Kotak Mahindra Bank and YES Bank were given a licence in 2004.
Other big names of the aspirants, who are seeking the approval
• Aditya Birla Nuvo
• Bajaj Finserv
• LIC Housing Finance Ltd
• L&T Finance Holdings
• Reliance Capital
• Religare Enterprises
• Shriram Capital
The in-principle approvals to these entities as a precautionary measure have been granted by RBI as after consulting the Election Commission. Earlier, the Union Finance Minister in his budget speech for the year 2010-11 announced that there is a need to extend the geographical coverage of banks and improve access to banking services. Further, on 22 February 2013, RBI issued guidelines for licensing new banks. The HLAC was set up on 30 October 2013 under the chairmanship of former RBI Governor, Dr. Bimal Jalan and the committee comprised other three members. The other three members were
• C.B. Bhave, former Chairman, SEBI
• Usha Thorat, former Deputy Governor, RBI
• Nachiket Mor, Director, RBI Central Board
HLAC was set to screen the applications and recommend licenses only to those applicants who complied with the guidelines.
The Guidelines for Licensing of New Banks in the Private Sector and its key features are
(i) Eligible Promoters: 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).
(ii) ‘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 10 years. For this purpose, RBI may seek feedback from other regulators and enforcement and investigative agencies.
(iii) Corporate structure of the NOFHC: The NOFHC shall be wholly owned by the Promoter / Promoter Group. The NOFHC shall hold the bank as well as all the other financial services entities of the group.
(iv) Minimum voting equity capital requirements for banks and shareholding by NOFHC: The initial minimum paid-up voting equity capital for a bank shall be `5 billion. 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 bank shall get its shares listed on the stock exchanges within three years of the commencement of business by the bank.
(v) Regulatory framework: The bank will be governed by the provisions of the relevant Acts, relevant Statutes and the Directives, Prudential regulations and other Guidelines/Instructions issued by RBI and other regulators. The NOFHC shall 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.
(vi) Foreign shareholding in the bank: The aggregate non-resident shareholding in the new bank shall not exceed 49% for the first 5 years after which it will be as per the extant policy.
(vii) Corporate governance of NOFHC: At least 50% of the 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.
(viii) Prudential norms for the NOFHC: 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.
(ix) Exposure norms: The NOFHC and the bank shall not have any exposure to the Promoter Group. The bank shall not invest in the equity / debt capital instruments of any financial entities held by the NOFHC.
(x) Business Plan for the bank: The business plan should be realistic and viable and should address how the bank proposes to achieve financial inclusion.
(xi) Other conditions for the bank:
• The Board of the bank should have a majority of independent Directors.
• 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 10 billion for every block of 5 billion.
• Any non-compliance of terms and conditions will attract penal measures including cancellation of licence of the bank.
(xii) Additional conditions for NBFCs promoting / converting into a bank: Existing NBFCs, if considered eligible, may be permitted to promote a new bank or convert themselves into banks.