Indian private corporates and non-banking finance companies can apply for licences to set up banks.
This is, however, subject to their not having ‘significant' income or assets or both from real-estate and capital markets.
In its draft guidelines for licensing new banks in the private sector, unveiled on Monday, the central bank has tackled concerns on corporates possibly using banks as private pools of readily available capital by prescribing stringent checks and balances.
Those intending to apply for new bank licences had better brace themselves for a hard grind. They have to achieve financial inclusion, open at least 25 per cent of the branches in unbanked rural centres, and meet priority sector lending targets.
The final guidelines will be issued later. The process of inviting applications for setting up new banks in the private sector will be initiated only after the Banking Regulation Act is amended.
The wait for bank licence hopefuls such as the Tatas, the AV Birla group, the Reliance (Mukesh Ambani as well as ADAG) Group, L&T, M & M, Bajaj Finserv, Shriram Transport Finance, LIC Housing Finance, among others, may have gotten a bit longer.
According to the draft guidelines, only entities/groups in the private sector, owned and controlled by residents, with diversified ownership, sound credentials and integrity and having successful track record of at least 10 years, will be eligible to promote banks.
However, adverse feedback on applicants from other regulators and enforcement and investigative agencies could put paid to their dreams of setting up a bank. Promoter/promoter groups will be permitted to set up a new bank only through a wholly-owned non-operative holding company (NOHC). The NOHC will be registered as a non-banking finance company with the RBI.
The objective of the NOHC is to ring-fence the regulated financial services activities of the group, including the new bank, from other activities of the group such as commercial, industrial and financial activities not regulated by financial regulators. The RBI has set the initial minimum paid-up capital for a new bank at Rs 500 crore against Rs 200 crore when licences were issued to Kotak Mahindra bank and YES Bank, in 2001.
Minimum capital
The NOHC has to hold a minimum 40 per cent of the paid-up capital of the bank for a period of five years from the date of licensing of the bank. Any shareholding in excess of 40 per cent has to be brought down by the NOHC within two years from the date of licensing of the bank.
The holding company is required to bring down its shareholding to 20 per cent within 10 years and to 15 per cent within 12 years from the date of the bank's licensing and retained at that level thereafter.
Foreign shareholding
Aggregate non-resident shareholding via FDI and by NRIs and FIIs in the new private sector banks cannot exceed 49 per cent for the first five years from the date of licensing of the bank.
To take care of ‘self-dealing'
In the case of promoter group having 40 per cent or more assets/income from non-financial business, the board of the bank should have a majority of independent directors. The exposure of the bank to any entity in the promoter group, their business associates, major suppliers and customers cannot exceed 10 per cent and aggregate exposure to such entities cannot exceed 20 per cent of the net worth of the bank.
Further, all credit facilities to promoter-linked entities should have a minimum tangible security cover of 150 per cent.