The Reserve Bank of India has spelt out norms for new bank licences after years of waiting, allowing business houses, state-run enterprises and non-banking finance companies to set up banks, in a bid to extend banking services to half of the population that is excluded from them. The final rules allow companies from any sector to apply for new bank licences, dropping language in earlier drafts that would have kept out brokers and those in the real estate business. Though these changes are in line with the views of the finance ministry, which had batted for brokers and realtors, the new guidelines contain enough subjectivity for RBI to reject applications from those it deems unsuitable for the banking business. The central bank will issue licences only to persons deemed to be ‘fit and proper’, and will seek feedback on applicants from various investigative agencies such as CBI, ED and I-T Department before granting a licence. Further, RBI has empowered itself to reject those whose “business model” and “culture” are not in line with 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,” the guidelines said.
“RBI guidelines are sensible and realistic and I believe the norms are well thought through,” said Deepak Parekh, the chairman of HDFC, which floated HDFC Bank- the country’s most valuable bank now – in the first wave of private banks in 1994. “I understand the rationale for keeping bank licence norms precautionary.” “We welcome the long-awaited new banking guidelines, which are very forward-looking. We will actively pursue our interest in banking as it will complete our financial services’ portfolio,” said Kumar Mangalam Birla, chairman, Aditya Birla Group. The central bank tempered expectations on the likely number of new banks by prescribing .`500 crore as the starting capital, but drew praise from experts and led to optimism among business houses such as the Mahindras and Shriram Group, which said they would apply for licences. “RBI has given the right kind of emphasis to record, sound credentials and integrity,” said Bharat Doshi, chairman, Mahindra and Mahindra Financial Services, which aims to convert into a bank.
“There is a lot of room for RBI in how they go about filtering the applications. It will ultimately apply a fair benchmark. There will be challenges.” RBI’s final guidelines on new banks come nearly nine years after the last two private sector bank licences were issued to Kotak and Yes Bank in 2004. The central bank sought power to supersede boards and access to books of promoter companies to prevent misuse before issuing new licences. The powers have been granted under the Banking Regulation bill passed by Parliament during the winter session. The finance ministry and the regulator have been arguing over the desirability of permission to real estate companies and those in the brokerage business, but the central bank gave in by removing industry-wise restrictions. New banks will be permitted under the framework of non-operating financial holding company, which has to be listed on the stock exchange within three years of operation and under which all activities in the financial services sector will be permitted. “The essence is that you should not be in a speculative business,” said Ashwin Parekh, national leader-financial services at Ernst & Young. “They dropped real estate and broking, but have brought in all businesses now.”
The aggregate non-resident shareholding from FDI, NRIs and FIIs in the new private sector banks is being capped at 49% of the bank for the first five years, even though current norms permit as high as 74%. Applicants will have to furnish business plans when they apply for a licence, which will explain how it plans to achieve financial inclusion that has proved difficult for even state-run banks after more than four decades of nationalisation. “Deletion of references to real estate and brokerage, and the inclusion of PSUs are the first thing that jump at you,” said Shinjini Kumar, director, PricewaterhouseCoopers. “People are realistic and they know that everybody will not get the licence.” The guidelines drafted by RBI Deputy Governor Anand Sinha require applicants to have run successful business operations for a decade in order to be eligible for a new licence. There are also elaborate rules restricting transactions between banks and promoter group companies. “The bank shall maintain arm’s length relationship with promoter, promoter group entities, and the major suppliers and major customers of their clients,” the guidelines said. “The bank cannot take any credit and investments, including in equity, debt capital instruments, exposure on the group entities or individuals associated with the promoter group or the holding company.” RBI is clear, as in the past, that banking is a special business and requires special attention and cannot be conducted like any other business where people’s money is not involved. Hence, only a few could make it even if scores of applicants meet the eligibility.
“Banking being a highly leveraged business, licences shall be issued on a very selective basis to those who conform to requirements, who have an impeccable track record and who are likely to conform to the best international and domestic standards of customer service and efficiency,” it said. “Therefore, it may not be possible for RBI to issue licences to all the applicants meeting the eligibility criteria prescribed above.” The applications will first be screened by RBI and will then be referred to a high-level advisory committee, the central bank said on Friday.
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