After years of delay, the Reserve Bank of India (RBI) has finally spelt out norms for granting new banking licenses, in support of Government’s agenda of inclusive banking. The final rules permit companies from any sector to apply for new bank licenses, thereby dropping the language in the earlier draft which ruled out entries to brokerage houses and companies in the real estate business. Thus by doing so, the RBI seems to have honoured the finance ministry view that the aforesaid business should be considered eligible for setting up new banks. But on the other hand the new guidelines have enough subjectivity for the central bank to reject an application on the grounds of unsuitability for banking business.

The RBI has empowered itself to reject those whose “business model” and “culture” are not in lines with the banking. “Promoter Groups' business model and business culture should not be misaligned with the banking model, and their business should not potentially put the bank and the banking system at risk on account of group activities such as those which are speculative in nature or subject to high asset price volatility,” as said in the guidelines.

Moreover, in their endeavour of issuing banking licenses only to “fit and proper” business houses, the central bank will seek feedback on applicants from various investigation agencies such as Central Bureau of Investigation (CBI), Election Directorate (ED), and Income Tax (I-T) department

So, what are the criteria to obtain a banking license and thereafter?

Well, they are as under:
 

• Primarily, you need to have a 10 years of financially sound and successful track record
• One needs to set up a wholly owned Non-Operative Financial Holding Company (NOFHC)
• The minimum paid-up capital of the bank should be Rs 500 crore
• Banks can raise capital within 5 years through public issue and private placement
• NOHFC must hold minimum 40% of paid-up capital for 5 years
• Equity capital must be brought down to 40% in 3 years
• The promoters stake should be phased down to 20% in 10 years and 15% in 12 years
• Foreign shareholding upto 49% be allowed for 5 years
• Bank should get listed in 3 years
• Banks should maintain a Capital Adequacy Ratio (CAR) of 13% for 3 years
• Stricter corporate governance norms must be followed
• 25% of the branches of the bank should be opened in non-banked rural areas
   

Who can apply?

Public enterprises, private entities and existing Non-Banking Finance Companies (NBFCs) can apply for a banking license, provided they meet the aforementioned guidelines.

We are of the view that, the entry criteria as laid down, such as the number of years of existence with a financially sound and successful track record along with the capital structure to be followed, may temper expectations, as many new players who are desiring an entry may not meet the required criteria. Moreover even if they do, check on the business model and culture would further help in filtration along with feedback on applicants from investigative agency. Thus while the RBI has welcomed all, pleasing even the finance ministry with its suggestion (of considering brokerage and companies in the real estate business) it has kept a good control vide some subjectivity in the guidelines. Thus we think overall the guidelines are quite encouraging, by emphasising on integrity and sound credentials of the applicants and help in stimulating trust of the customers as well.

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