The Reserve Bank of India on Friday set the stage for entry of new banks in the private sector by unveiling the much-awaited final guidelines.
The central bank appears to have accommodated the Government’s viewpoint and reversed the stand it had taken in the draft guidelines of not allowing broking and real-estate companies in the banking space.
The RBI said entities in the private sector, public sector and non-banking finance companies (NBFCs) will be eligible to set up a bank. Eligible NBFCs could be permitted to promote a new bank or convert themselves into banks.
Eligible promoters will have to make an application to the RBI by July 1, 2013.
The riders
The RBI, however, has given itself some wiggle room to reject applications. It said the promoter’s business model and business culture should not be misaligned with the banking model.
Further, the promoter’s business should not put the bank and the banking system at risk on account of activities such as those which are speculative in nature or subject to high asset price volatility.
The RBI will also check the promoter’s past track record of sound credentials and integrity; financial soundness and successful track record of running their business for at least 10 years; and seek feedback from other regulators, enforcement and investigative agencies.
Among others, the players which are expected throw their hat in the ring to get banking licences are: L&T Finance Holdings, Tata Capital, Aditya Birla Financial Services, Reliance Capital, LIC Housing Finance, Mahindra & Mahindra Financial Services, Religare Enterprises, and Indiabulls.
According to Shinjini Kumar, Director, PwC, the RBI has thrown open the field wider by relaxing the entry barrier.
The guidelines come three years after the then Finance Minister Pranab Mukherjee announced that the RBI is considering giving some additional banking licences to private sector players.
The last time that the central bank gave banking licences was a decade ago when Kotak Mahindra Finance Ltd got converted into a commercial bank and YES Bank was floated.
Entities/groups which intend to float a bank will have to set it up through a wholly-owned non-operative financial holding company (NOFHC), which will be registered as a non-banking finance company.
The NOFHC and the bank cannot have any loan exposure to the promoter group.
Further, the bank cannot invest in the equity/debt capital instruments of any financial entities held by the NOFHC.
The initial minimum paid-up voting equity capital of the new bank, whose board should have a majority of independent director, has been set at Rs 500 crore (it was Rs 200 crore when Kotak Bank and YES Bank were set up).
The Holding Company will initially hold a minimum 40 per cent of the paid-up voting equity capital of the bank, which will be locked in for a period of five years and brought down to 15 per cent within 12 years.
The RBI said the aggregate foreign shareholding in the new bank cannot exceed 49 per cent for the first five years.
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