Mumbai: Those seeking to set up new banks will have up to 18 months instead of 12 to do so once they secure approval, the Reserve Bank of India (RBI) said on Monday, giving applicants more time to adhere to the central bank’s mandatory holding structure.
The change was made after queries from applicants “brought out several complex issues pertaining to reorganization of the existing corporate structure, restructuring of businesses, and meeting the regulatory requirements”, India’s central bank said in a 165-page statement posted on its website.
“It is expected that this would provide sufficient time for the promoters/promoter group to comply with the various stipulations in the guidelines and the terms and conditions that would be set out while granting the in-principle approvals to successful applicants,” it said.
The deadline for applications, however, remains unchanged at 1 July.
RBI has received 443 queries from 34 individuals and organizations. As many as 330 queries from 19 individuals and organizations were received between 5 April and 10 April, RBI said.
Replying to a specific question on the minimum/maximum number of licences to be issued, RBI said: “There is no predetermined number. RBI will be very selective while considering the applications for new bank licences. It will look for very high-quality applications. It may, therefore, not be possible to issue licences to all the applicants meeting the eligibility criteria.”
The proposed non-operative financial holding company (NOFHC) that is supposed to act as the holding company for all financial businesses is the preferred structure for new banks, RBI said. However, applicants covered by other regulators need to approach them so that such units come under NOFHC.
For example, if the company applying for a banking business has an insurance business regulated by the Insurance Regulatory and Development Authority, the latter will decide wheth er the division can come under NOFHC.
“Therefore, at the minimum, the proposed bank and all RBI regulated entities will necessarily be under NOFHC,” RBI said.
In instances where there is a delay in the granting of approval by regulators or the government, RBI may consider granting an extension of time for operationalizing the bank, it said.
RBI also reiterated that there will be no relaxation on norms for the new banks when it comes to maintaining the mandatory cash reserve ratio (CRR) or the statutory liquidity ratio (SLR), and that they will have to also lend 40% of their net adjusted bank credit to the so-called priority sector.
Banks keep 4% of their deposits with RBI as CRR at zero interest, and they have to invest 23% of their deposits in government securities as SLR. Besides this, they have to mandatorily give concessional loans to farmers, small exporters and minority sections of society, referred to as the priority sector. RBI has said that the new banks will have enough time to meet these norms.
“For example, if ‘in-principle’ approval is granted in February 2014, the bank has to commence banking business latest by August 2015. In that case, the bank has to maintain priority sector by March 31, 2017, on the credit base as of March 31, 2016. In such a scenario about 37 months would be available to the promoters/promoter groups to achieve the target,” RBI said.
For banks that have been converted from non-banking financial companies (NBFCs), or which acquire the loan book of an NBFC, the priority sector target will be counted on the entire portfolio after the commencement of business, RBI said.
Naresh Makhijani, executive director at audit and consulting firm KPMG India Pvt. Ltd, said RBI has provided enough time for the achievement of priority sector loan norms and the clarifications on the issue are helpful for most aspirants.
“It was one of the key areas that needed clarifications. Besides, RBI has extended the operationalizing period so that the new bank has enough time to align itself with what RBI wants. Now everything is clear and the groups that don’t yet meet the criteria will have to reorganize their business models based on lucidly laid-out criteria,” Makhijani said.
Firms such as KPMG, Deloitte Touche Tohmatsu Ltd, Ernst and Young Pvt. Ltd and PricewaterhouseCoopers Pvt. Ltd among others are advising firms on their application to set up new banks.
Companies that have so far expressed interest in starting banks include L&T Finance Holdings Ltd, India Infoline Ltd, Religare Enterprises Ltd, the Aditya Birla Financial Services Group, Mahindra and Mahindra Financial Services Ltd, LIC Housing Finance Ltd, Shriram Transport Finance Co. Ltd, Bandhan Financial Services Pvt. Ltd, Janalakshmi Financial Services Pvt. Ltd, Tata Capital Ltd, Muthoot Finance Ltd, IDFC Ltd, Reliance Capital Ltd, India Infrastructure Finance Co. Ltd, Bajaj Finserv Ltd, SKS Microfinance Ltd and Srei Infrastructure Finance Ltd.
Religare Enterprises group chief executive Sachindra Nath said the company already operates through a holding company structure and a transition to a banking business will be easy for the group if it gets a licence to operate a bank. There is no issue about cross holdings by stakeholders as the subsidiaries are majority-owned by Religare and the bank will also not have any problem adhering to the priority sector norm owing to its network of 1,800 branches, according to him.
“We have some innovative plans that we plan to pitch to RBI, and if we get the approval, we are good to go. We were clear about the criteria that RBI had put out in its guidelines and we met all of them. Hence, we did not ask for clarifications from RBI,” said Nath.
RBI also said on Monday that existing NBFC branches in tier-II to tier-VI cities and towns would automatically be converted into bank branches, depending on the business plans of the promoters.
“In the case of tier-II centres, conversion would only be allowed with the specific prior approval of RBI and subject to the existing rules/methodology applicable to domestic banks regarding opening of branches in these centres, and also subject to maintaining a minimum 25% of the bank branches in unbanked rural centres (population up to 9,999 as per the latest census),” it said.
In case NBFCs have excess branches in tier-I towns, they will be adjusted against the future entitlements of the new bank within a maximum period of three years from the date of commencement of business by the bank. “The remaining tier-I branches will have to be closed down at the end of three years. The promoters group have to provide a road map in this regard,” RBI said.
There is also no change in the 49% foreign direct investment and 5% individual, non-resident shareholding for the first five years. Capital requirements also remain the same. The minimum capital required by applicants for licences is Rs.500 crore.