Mumbai: Some banks and financial institutions want Rs1,000 crore as minimum capital requirement for proposed new banks, double the amount the regulator had indicated in its draft guidelines.
Another critical suggestion from some institutions is that foreign holding in new banks should be permitted up to 74%. The Reserve Bank of India’s (RBI’s) draft norms had suggested 49% foreign holding in new banks.
RBI on Tuesday released the gist of comments from various stakeholders such as banks and non-banking financial companies (NBFCs), corporate houses and industry associations on each of the critical issues featured in the August 2011 draft norms on banking licences, including minimum capital, ownership and foreign ownership.
Eligibility of promoters
Draft norms: Aspirants must have diversified ownership, sound credentials and 10-year successful track record. Applicants should list group companies undertaking key business activities. Those groups conducting activities such as real estate, capital market activities and broking are riskier.
Feedback flows: The Reserve Bank of India building in Mumbai. Photo: Bloomberg
Comments: New bank aspirants seek clarity on the stipulations on eligibility criteria of promoters and clear definitions on real estate construction, ownership diversification and promoter group. Clarity is also being sought on the eligibility of entities with indirect government control.
Draft: Promoter groups can set up a new bank only through a wholly owned non-operative holding company (NOHC), which will hold the bank as well as all other financial services companies in the group.
Comments: Business houses, NBFCs and a federation of industries want to revisit the requirement of NOHC to be wholly owned by the promoters, and diversified shareholding at the NOHC level be permitted to improve corporate governance and avoid regulatory overlap. Specialized businesses such as infrastructure and housing finance should be allowed to be continued outside the bank.
Draft: Initial minimum paid-up capital for a new bank is pegged at Rs500 crore. NOHC to hold a minimum of 40% of the paid-up capital of the bank, with a five-year lock-in period. Holding in excess of 40% of the total paid-up capital to be brought down to 40% within two years from the date of licensing of the bank. Shareholding by NOHC shall be brought down to 20% within 10 years and 15% within 12 years.
Comments: Some banks and institutions suggest minimum capital at Rs1,000 crore. Suggestions are also there to increase the time for dilution of promoter shareholding to 40% in the bank from two years to three-five years horizon. Some want the dilution to a period of 15 years and permission to hold higher stakes for promoters and NOHC.
Draft: Total overseas shareholding through foreign direct investment, non-resident Indians and foreign institutional investors in the new banks not to exceed 49% for the first five years from the date of licensing. No foreign shareholder, directly or indirectly, individually or in groups, will be permitted to hold 5% or more of the paid-up capital of the bank. Currently, foreign shareholding limit in private sector banks is capped at 74%.
Comments: Some institutions suggest foreign shareholding should be permitted up to a level of 74%. A few business houses, NBFCs and an industry federation felt that restricting foreign shareholding to 49% for initial five years was not a deterrent. A federation suggest 5% limit to be raised to 25% to attract strategic investors.
Draft: At least 50% of the directors of NOHC to be independent directors. No financial services entity under NOHC to be allowed to engage in any activity that a bank is permitted to undertake departmentally. All such activities to be moved to the new bank.
Comments: Infrastructure companies suggest that the infrastructure business should be allowed to be run outside the bank. Infrastructure companies getting converted into banks should be given exemption from the pre-emptions such as cash reserve ratio or the portion of deposits to be kept with RBI, statutory liquidity ratio or banks’ investment in government bonds, priority sector lending, etc., in the initial years. Banks are required to give 40% of their loans to economically weaker sections of society under the so-called priority sector norms.
Some NBFCs say that a time span of two-three years or 5-10 years should be given to the bank to transfer activities permitted to it from other entities or NBFCs in the group. They also say tax implication for transferring existing financial services business to the bank should be addressed. According to some NBFCs, a large number of independent directors in holding company are of no use.
Draft: Aspirants are to forward business plan for the new banks along with their applications, which should be realistic and viable. It should outline the model to explain how the bank proposes to achieve financial inclusion; 25% of the bank branches to be in unbanked rural centres.
Comments: There are suggestions seeking to specify targets for financial inclusion. The head offices of banks should be encouraged to be based in a non-metro centre. NBFCs, business federations and chambers of commerce say the stipulation on banks having 25% of branches in unbanked rural centres is too onerous; they want this to be revised to 15%.