India is an under-banked country. Only about 35% of adult Indians have a bank account as against the global average of 50%. The banking penetration in India is largely restricted to urban areas. In order to expand the reach of banking services; about 3 years back the Government had decided to allow issuance of new banking licenses in the private sector. However, keeping in mind role of banking sector in the economy; issuing a banking license requires thorough and meticulous assessment of all applications. Reserve Bank issued draft guidelines in August 2011. In consultation with the Government and based on suggestions received; RBI made some important amendments to The Banking Regulation Act, 1949, and also finalised the guidelines in February 2013. Final guidelines reflect the expectations of the regulator from aspirant banking corporations in respect to structure, capital requirements, reach and role to be played in development.

The list of corporate seeking a banking license is long and only 2 or 3 among them would get through. As a reason, the issued guidelines may have been stricter as might have been felt by some. RBI has received hundreds of queries seeking clarification on some guidelines. Most of the queries have been on the following aspects of the guidelines:
 

• The eligibility of promoters
• Corporate structure of Non-Operative Financial Holding Company (NOFHC),
• Foreign shareholding and the transition time to new structure
   

Earlier, RBI had said that all banking licenses would be reviewed on 'fit-and-proper' criterion. Besides, assessment of promoters and the management of the prospective bank it was also felt necessary to ensure that businesses are not 'misaligned' with banking model. Many aspirants sought clarification on some of the terms used in guidelines and requested inclusive definitions.

RBI's clarification...

However, RBI has clarified that it cannot issue any exhaustive definition and would assess application on aforesaid criteria would also be a matter of judgment. RBI has remained stubborn on most of the guidelines. However, it has given some more time to all aspirants to change existing structures to that prescribed in the guidelines. In February, RBI had made it clear that validity of the in-principle approval for setting up NOFHC would be 1 year from the date of issue. RBI has relaxed the timeline by granting 18 months to set up NOFHC from the date of in principle approval. Further clarifying on the issue of setting up NOFHC, RBI has affirmed its stance wherein it envisaged the perspective bank and other regulated financial services entities of the promoter or the promoter group to be held under NOFHC. RBI has asked aspirants to seek permission from other regulators such as Securities and Exchange Board of India (SEBI) or Insurance Regulatory and Development Authority (IRDA). While granting licenses, RBI will not overlook decisions taken by respective regulators and they would prevail.

PersonalFN is of the view that, RBI has been steadfast in its approach and has been demonstrating utmost of diligence. Since the guidelines are expected to be implemented in their strictest sense, prospective banks might be well placed to serve the purpose of expanding the reach of banking services. Stringent norms pertaining to capital requirements and corporate structure would ensure only strong players sail through. However, you might have to wait a little longer to see new banks on streets.

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