RBI, on 29th Aug, 2011, issued draft guidelines for licensing of new banks in the private sector. This has been cheered by corporates and NBFCs, especially NBFCs whose stock prices zoomed after the news. The draft guideline was much awaited by corporates who have shown keen interest in entering the highly regulated banking sector. RBI has sought the feedback, suggestions, and ideas on the draft guidelines by 31st October, 2011. Once RBI reviews the feedback and opinions of experts, bankers, corporate houses, and economists, it will draft the final guidelines and invite the application for licenses to set up banks.
Let’s look at some of the important criteria mentioned in the draft guidelines.
Eligibility –
Regulation: The corporate entities seeking to enter banking sector should have successful track record of 10 years. They should be owned and controlled by residents of India. At the same time, their income or assets or both should not exceed 10% in real estate and broking activities if they are into real estate and broking business too.
Analysis: This requirement rules out new businesses with records of less than 10 years. Hence new age entrepreneurs will not be able to participate in the banking business. The requirement regarding limitation on real estate and broking shareholding is good as there will be a conflict of interest between the real estate & broking business and the bank.
Structure –
Regulation: The corporates will have to register a non-operative holding company with RBI. This NOHC will hold the bank and other financial institutions run by the corporate. The shareholders of bank under the NOHC can be non-financial businesses of the corporate. Other financial institutions of the same group cannot have shareholding in the bank.
Analysis: This was done to achieve two purposes. First is to demarcate the banking & financial businesses from other businesses of corporates. Second is to facilitate its regulation by the RBI. All banks work under the directives of RBI and having NOHC separate from the other businesses will help both the corporate house and RBI to define their discretionary power.
Capital Requirement –
Regulation: The capital required will be at least be 500 crore.
Analysis: This is a good step as it is increased from 300 crore to 500 crore. SEBI wants to ensure a larger capital base.
Foreign Shareholding –
Regulation: Foreign shareholding will not extend beyond 49% for the first 5 years. After 5 years, the existing policy regarding foreign shareholdings will come into effect. The foreign entities include NRI, FDI, and FIIs.
Analysis: The step about limiting the foreign shareholding to 49% is not encouraging. However, this is still better. The expectation was that the foreign shareholders will be allowed to hold the majority part too.
Corporate Governance –
Regulation: Independent directors should be 50% or more in the board. This is to ensure that the bank doesn’t show extra favour to other businesses of the group. The independent directors will truly be independent, not coming from their group holding companies, clients, and suppliers.
Analysis: This is a very good step by RBI. RBI doesn’t limit only the people working in the corporate group but also entities that deal with it. This will result in better and more independent decision making processes.
Financial inclusion –
Regulation: The requirement for financial inclusion is overarching, showing RBI’s move to cover unbanked population. A corporate has to clarify its plan for financial inclusion as well as open 25% branches in rural centres where access to financial institution is lacking.
Analysis: This is a noble objective but forcing corporate houses to mandatorily start rural branches to cater to an unbanked population is not right. It will be difficult for corporate houses to fulfil this when even public sector banks are facing operational issues in running branches in those areas. Moreover, objectives like financial inclusion should not be forced upon corporate houses. State cannot delegate its own responsibility to private businesses.
Other requirements –
Regulation: The exposure of bank should not exceed 10% of the paid-up capital and reserves to one entity of the corporate house and 20% to all entities combined.
Analysis: This step ensures that a bank doesn’t misuse public money by providing loans of disproportionate amount to the same corporate house and expose itself to undue risk.
Regulation: The bank will get listed in exchange within 2 years of getting the license.
Analysis: Listing will make working of the bank more transparent. Presence of retail and institutional investors as equity holders will also keep a check on bank executives from taking risky bets.
Final Comments
The drafting of guidelines for new banking licenses have been a much awaited event. There have been requests from corporate houses in the past to allow them to venture into banking. While RBI’s concerns are genuine, these can be overcome by implementing a stringent regulation.