Indian companies may have reasons to rejoice, as the Reserve Bank of India (RBI) is likely to allow some of them an entry into the banking space. The entry will, of course, be subject to stiff riders. Real estate companies, however, may not be as lucky as they are among four sectors that will find the banking doors locked.
According to a government official, the RBI is expected to come out with draft guidelines on allowing new private banks, as the Finance Ministry and the central bank have resolved their differences on most of the contentious issues.
Capping New Banks
The official said Foreign Direct Investment (FDI) in new banks may be capped at 49 per cent for now, as the RBI was not in favor of higher FDI. In a discussion paper released in August 2010, the central bank had suggested capping FDI in new banks at 49 per cent in the first 10 years, which could be subsequently raised to 74 per cent. The ministry was open to a higher cap.
The number of new licenses to be issued has not been decided yet and the call will be taken by the RBI.
The guidelines were more or less final, but the regulator would want to give a one-month window to all stakeholders to give their suggestions on the draft, said the official.
On the reasons for keeping real estate companies out, the official said the government did not have a good experience when the sector was allowed in the Special Economic Zone space.
Foreign Investment Limit
The central bank had sent the draft guidelines to the Finance Ministry in January 2011 to seek its approval. The process got delayed as differences cropped up over the grant of licenses to industrial houses, the minimum foreign investment limit and caps on promoter shareholding.
It is learnt that initially the RBI was not in favor of giving licenses to big corporate entities, while the finance ministry was opposed to restricting the FDI limit to 49 per cent. At present, banks are allowed to have an aggregate 74 per cent foreign investment (FDI plus foreign portfolio investments), with a cap of five per cent for a single investor.
The norms will also minimize the downside risks of industrial houses promoting banks and ensure promoters of these new banks meet the "fit and proper" criteria. This would make it difficult for any entity to get a license if any case involving it was pending before any regulator.
The minimum capital requirement for new banks may be kept at Rs 1,000 crore, five times the requirement when new bank licenses were given in 2001. The RBI had stipulated this be increased to Rs 300 crore over three years from the commencement of business. The minimum promoters' contribution may be retained after dilution of stake over a period of five years.
Retention of Current Approach
In its discussion paper, the RBI had suggested retention of the current approach of requiring promoters to bring in a minimum of 40 per cent of capital with a lock-in clause for five years. The threshold for other significant shareholders was proposed to be restricted to a maximum of 10 per cent, with a requirement to seek acknowledgement from the RBI on reaching the five per cent threshold and above. "Promoters, too, would have to dilute to the extent required in a time-bound manner, say, five years after the lock-in period," the discussion paper said.
The grant of new licenses will be linked to financial inclusion as the finance ministry is looking at a nationwide roll-out of Unique Identification (UID) numbers with the help of banks.
Industrial houses such as Larsen & Toubro, Reliance Anil Dhirubhai Ambani Group, Aditya Birla Group and the Shriram group have expressed interest in setting up banks. Currently, the space is dominated by the State Bank of India and private lenders such as ICICI Bank and HDFC Bank.
In the 2010-11 Budget, Finance Minister Pranab Mukherjee had first announced that new banking licenses would be issued to private sector players and non-banking finance companies to extend the geographic coverage of banks and improve access to banking services.
According to a government official, the RBI is expected to come out with draft guidelines on allowing new private banks, as the Finance Ministry and the central bank have resolved their differences on most of the contentious issues.
Capping New Banks
The official said Foreign Direct Investment (FDI) in new banks may be capped at 49 per cent for now, as the RBI was not in favor of higher FDI. In a discussion paper released in August 2010, the central bank had suggested capping FDI in new banks at 49 per cent in the first 10 years, which could be subsequently raised to 74 per cent. The ministry was open to a higher cap.
The number of new licenses to be issued has not been decided yet and the call will be taken by the RBI.
The guidelines were more or less final, but the regulator would want to give a one-month window to all stakeholders to give their suggestions on the draft, said the official.
On the reasons for keeping real estate companies out, the official said the government did not have a good experience when the sector was allowed in the Special Economic Zone space.
Foreign Investment Limit
The central bank had sent the draft guidelines to the Finance Ministry in January 2011 to seek its approval. The process got delayed as differences cropped up over the grant of licenses to industrial houses, the minimum foreign investment limit and caps on promoter shareholding.
It is learnt that initially the RBI was not in favor of giving licenses to big corporate entities, while the finance ministry was opposed to restricting the FDI limit to 49 per cent. At present, banks are allowed to have an aggregate 74 per cent foreign investment (FDI plus foreign portfolio investments), with a cap of five per cent for a single investor.
The norms will also minimize the downside risks of industrial houses promoting banks and ensure promoters of these new banks meet the "fit and proper" criteria. This would make it difficult for any entity to get a license if any case involving it was pending before any regulator.
The minimum capital requirement for new banks may be kept at Rs 1,000 crore, five times the requirement when new bank licenses were given in 2001. The RBI had stipulated this be increased to Rs 300 crore over three years from the commencement of business. The minimum promoters' contribution may be retained after dilution of stake over a period of five years.
Retention of Current Approach
In its discussion paper, the RBI had suggested retention of the current approach of requiring promoters to bring in a minimum of 40 per cent of capital with a lock-in clause for five years. The threshold for other significant shareholders was proposed to be restricted to a maximum of 10 per cent, with a requirement to seek acknowledgement from the RBI on reaching the five per cent threshold and above. "Promoters, too, would have to dilute to the extent required in a time-bound manner, say, five years after the lock-in period," the discussion paper said.
The grant of new licenses will be linked to financial inclusion as the finance ministry is looking at a nationwide roll-out of Unique Identification (UID) numbers with the help of banks.
Industrial houses such as Larsen & Toubro, Reliance Anil Dhirubhai Ambani Group, Aditya Birla Group and the Shriram group have expressed interest in setting up banks. Currently, the space is dominated by the State Bank of India and private lenders such as ICICI Bank and HDFC Bank.
In the 2010-11 Budget, Finance Minister Pranab Mukherjee had first announced that new banking licenses would be issued to private sector players and non-banking finance companies to extend the geographic coverage of banks and improve access to banking services.
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