Photo: Aniruddha Chowdhury/Mint
Photo: Aniruddha Chowdhury/Mint

RBI proposes on-tap bank licences, bars conglomerates

In its draft guidelines, RBI proposes to allow applications for universal bank licences at any time, subject to a list of conditions

Mumbai: The Reserve Bank of India (RBI) on Thursday released draft guidelines for issuing on-tap universal bank licences but excluded large industrial houses from entering the sector. The proposed licensing policy is a change from the current stop-start policy where RBI opens the window for bank licences periodically but rarely.

Under Raghuram Rajan, RBI has been trying to create a more diverse banking sector that can better serve the needs of the Indian economy.

Since Rajan took over in 2013, RBI has licensed two universal banks, 11 payment banks and 10 small finance banks. It has also floated the idea of allowing more differentiated banks, such as wholesale banks. By putting universal bank licences on-tap, it is taking the attempt to encourage a more diverse and competitive sector a step further.

It will not be easy to get a licence, though.

The conditions are daunting.

They prevent the entry of large conglomerates into the sector, something RBI has always been uncomfortable with.

Non banking financial companies (NBFCs), experienced individuals, even companies(that are not part of large conglomerates) have room to seek bank licence.

Existing NBFCs that are “controlled by residents" and have a successful track record for at least 10 years are among those that can apply for on-tap licences. In addition, individuals and professionals, who are residents and have 10 years of banking experience, can also now apply for a licence.

“...large industrial/business houses are excluded as eligible entities but permitted to invest in the banks to the extent of less than 10%," said RBI. The restriction is likely aimed at ensuring no unhealthy linkages between banks and their promoting industrial houses. Industrial houses can’t have a director on the board of a bank either.

And the 10% shareholding cap would apply to individuals and all inter-connected companies belonging to the concerned large industrial houses on an aggregate basis, said the regulator.

RBI further added that “entities and groups in the private sector" can only apply if they are “owned and controlled by residents". If such an entity has total assets of 5,000 crore or more, the non-financial business should not account for 40% or more in terms of total assets or gross income. While this provision (on “entities and groups in the private sector") may seem contradictory to the one disallowing large conglomerates, it probably means that RBI is keen on excluding the large and well- diversified business groups but doesn’t mind smaller companies (although a company with assets or gross income of at least 5,000 crore isn’t really all that small).

Promoters will also be scrutinized based on central bank’s fit and proper criteria.

The rules make it extremely difficult for companies to enter the banking sector, said former bankers adding that this may be a prudent approach.

“There should be an iron-clad regulation around the number of corporate entities that can buy in to an individual bank to avoid cartelization of any form," said Pratip Chaudhuri, former chairman of India’s largest bank, State Bank of India.

In the previous round of licensing, which concluded in 2014, 25 entities applied for new banking licences.These included Reliance Capital Ltd, Bajaj Finserv Ltd, Aditya Birla Financial Services Group, L&T Finance Holdings Ltd, LIC Housing Finance Ltd, Muthoot Finance Ltd and India Post. Only two NBFCs, IDFC Ltd and Bandhan Financial Services Pvt. Ltd, were eventually given licences.

“It has been RBI’s stance to not really allow corporate houses to come and open a bank in India to keep it safe from any influence—which is probably why the last time around when some had applied, none was selected for a licence," said M.D. Mallya, former chairman and managing director of Bank of Baroda. “The focus seems to be to bring the best of NBFCs into the formal banking system," he added.

Apart from excluding corporates directly, RBI has specified that even entities indirectly linked to large conglomerates can’t hold more than 10% stake in a bank. This may exclude corporate sponsored NBFCs such as L&T Financial Services and Reliance Capital.

“While the guidelines are not dramatically different from the last time, RBI has kept out large industrial houses and the rules are indeed very onerous," said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services Llp.

Parekh said that out of the 25 entities that applied in the previous round, about 3-4 may stand a chance to get on-tap licence. The entry rules to set up a bank have been kept unchanged.

The minimum paid-up capital for a bank shall be 500 crore, RBI said, adding that the bank shall maintain a minimum net worth of 500 crore at all times. Foreign shareholding in universal banks would be as per existing rules and hence capped at 74%.

Unlike the previous guidelines, the central bank has proposed to make the Non-operating Financial Holding Company (NOFHC) structure an option instead of making it mandatory. Individuals or a standalone promoting entity need not have an NOFHC to set up a bank, RBI said. However, if other group business are proposed to be set up after the bank is incorporated, the bank will have to move towards an NOFHC structure.

Further, RBI said that promoters need not own more than 51% stake in the NOFHC as against 100% ownership mandated in the previous guidelines.

Since the bank licensing will be on-tap, applications can be submitted to RBI at any time.

These applications will be referred to a Standing External Advisory Committee (SEAC) to be set up by RBI, which will evaluate them.

The decision to issue an in-principle approval for setting up of a bank will be taken by the central bank. “Reserve Bank’s decision in this regard will be final," the guidelines said.

RBI will publish names of applicants and those who are granted an in-principle nod on its website periodically.

The central bank will accept comments on the draft guidelines till 30 June.

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