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RBI may raise net worth for new banks

RBI may raise net worth for new banks
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First Published: Thu, Jun 24 2010. 11 19 PM IST

Updated: Thu, Jun 24 2010. 11 19 PM IST
Mumbai: The Reserve Bank of India (RBI) is likely to insist that non-banking financial companies (NBFCs) that want to become a bank have a net worth (equity and free reserves) of at least Rs1,000 crore.
This is one of the many changes the central bank is planning to make in licensing norms for the new set of banks that may be allowed to open for business in the next two years or so. In the early 1990s, when RBI allowed the first set of new private banks to start business, they were required to have a net worth of Rs100 crore. Earlier this decade, when RBI allowed two more banks to come into being, the amount was raised to Rs300 crore.
Among other norms, RBI may want at least 25% of the distribution network or branches of an NBFC to be in rural areas and its non-performing assets (or bad loans) to be not more than 2%, a person familiar with the development said.
Yet another critical criterion is a prospective NBFC’s exposure to sensitive sectors such as real estate and capital markets (the less the better). “Besides, the entity must have a diversified ownership,” added this person, who did not want to be identified.
To be sure, nothing has been finalized as yet and RBI’s internal discussion is at a preliminary stage, he added.
An email query sent to RBI did not elicit a response.
Finance minister Pranab Mukherjee said while presenting the Budget that RBI was considering issuing banking licences to private sector firms and NBFCs. Many believed that RBI was not adequately consulted on this; only a few months before the Budget its governor had said that RBI was in no hurry to open up the sector and allow new players.
Following the Budget, RBI, in its annual monetary policy statement in April, stated that it would come up with a discussion paper by July. It had also said that it would conduct detailed discussions with all stakeholders on the discussion paper and finalize guidelines for the licences after that.
All applications received in this regard are to be referred to an external expert group for examination; the group is to recommend whether RBI should grant the licences or not.
After the finance minister’s announcement, many Indian corporate houses, including the Aditya Birla Group and the Reliance-Anil Dhirubhai Ambani Group expressed their intentions of entering the banking space.
Reliance Capital Ltd, Srei Infrastructure Finance Ltd and Muthoot Capital Services Ltd are among the NBFCs keen to become a bank.
Interestingly, RBI’s existing ownership guidelines, released in 2005, restrict the ownership of large industrial houses in banks to 10%. The guidelines on conversion of NBFCs into banks also do not permit NBFCs promoted by a large industrial house or owned and controlled by public authorities, including local, state or Union governments, from becoming banks.
After the Budget announcement, RBI deputy governor Usha Thorat had said: “We will have to start working on it and...take into account our experience and what is practical.”
“There will be new licences. In the last five years we have not given any new licences. However, while we do this, we will keep in view the basic principles which are already there, mainly diversified shareholding, and fit and proper guidelines,” she had said. “The basic principles of ownership and governance will remain unchanged, because that has stood the test of time.”
An economist with a large corporate house in Mumbai said: “To support India’s growth capital, the RBI will have to allow new entrants into the banking space as banks’ balance sheet has to expand and this capital cannot come from fiscal coffers.”
“Since banks handle public money, the entrants will have to be credible names that would be able to pump in huge capital,” he added, asking not to be identified as his group is one of the aspirants for a banking licence. “The regulations would have to ensure high net worth requirement and a road map for dilution of holding.”
anita.b@livemint.com
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First Published: Thu, Jun 24 2010. 11 19 PM IST