RBI Opens Door to India Inc With Strong Fences

The Reserve Bank of India (RBI) on 29 August paved the way for corporate India to enter banking, but set stiff conditions that straightaway shut the door on real estate companies and brokerage firms. In its much-awaited draft guidelines for new private banks released on Monday, the RBI said private groups or entities with diversified ownership, sound credentials and a "successful track record" of 10 years would be allowed to apply for new banking licenses. The central bank is considering issuing banking licenses for the first time since 2004.
Such groups or entities cannot have more than 10 per cent or more assets or income from real estate and capital market activities.
Nonoperative Holding Company
The new banks can be set up only through a wholly owned, nonoperative holding company, or NOHC, that will control the bank and other financial service companies in the group, the RBI said. The NOHC, which will be registered as a non-banking finance company with the RBI, will include all financial arms of the founding group. The minimum capital required to set up new banks has been fixed at Rs 500 crore.
Banking aspirants such as the Aditya Birla Group, the Mahindra Group and Larsen & Toubro were generally happy with the guidelines -- something reflected in the sharp rise in the shares of some non-banking finance companies expected to seek banking licenses.
While Bajaj Finance ended 15 per cent higher, Reliance Capital, IFCI, SREI Infrastructure, Shriram Transport Finance and Mahindra & Mahindra Financial Services ended 2.5 to 11 per cent higher.
However, some felt some of the clauses gave the incumbents undue advantage. For example, the minimum capital adequacy ratio for existing banks is nine per cent as against 12 per cent prescribed for new banks.
New Draft Norms
Similarly, in existing banks, foreign shareholding is permitted up to 74 per cent. It has been capped at 49 per cent for new banks for the first five years. Another discrepancy is in the listing norms. While existing banks are not mandated to get listed, new banks have to be listed on local bourses within two years of licensing.
New banks would also have to open at least one in four branches in rural areas with a population of no more than 9,999.
While laying down the detailed eligibility criteria, the RBI has made it clear the licenses will be offered selectively after the final guidelines are framed and certain amendments made in the Banking Regulations Act, 1949. The central bank has sought comments on the draft norms from public and other stakeholders by October 31.
According to the draft norms, banking being a highly leveraged business, licenses shall be issued on a very selective basis to those who conform to the requirements, who have an impeccable track record and who are likely to conform to the best international and domestic standards of customer service and efficiency. Therefore, it may not be possible for RBI to issue licenses to all the applicants meeting the eligibility criteria.
The central bank will also seek feedback on applicants from other regulators, enforcement and investigative agencies such as Income Tax, Central Bureau of Investigation and Enforcement Directorate.
The RBI has also stipulated half the directors of the holding company be independent, with a view to keeping in check the influence of promoters.
RBI is directionally very clear it will allow the corporate sector to have a play in banking. The central bank has also made it clear what type of corporate it wants in the sector and only serious and long-term players can be considered.
Paid-Up Capital of Bank
The holding company will have to hold a minimum 40 per cent of the paid-up capital of the bank for an initial period of five years. It will have to reduce its shareholding in the bank to 20 per cent within 10 years and to 15 per cent within 12 years from the date of licensing. The new bank will have to be set up within a year of getting in-principle nod.
Individuals or institutions other than the holding company can own more than 10 per cent of the paid-up capital of the bank, directly or indirectly. Shareholding of five per cent or more by individuals and institutions will also be subject to prior RBI approval.
Despite the restrictions on foreign shareholding and higher capital requirements, the new banks will be competitively placed and will have a level playing field. The technology cost has come down sharply and these new players don't have any legacy issues like existing banks.
The RBI also proposed the business model for new banks include how they aim to achieve financial inclusion. They have to open 25 per cent of their branches in unbanked rural centers. The banks should also operate on the core banking solution platform from the beginning.
Nonbanking Finance Companies
The nonbanking finance companies seeking a banking license can either convert themselves into a bank or set up the bank separately.
For promoters having over 40 per cent income from non-financial business, the RBI has put in some additional guidelines. Banks promoted by these corporate entities will have to seek prior approval for raising paid-up capital beyond Rs 1,000 crore for every block of Rs 500 crore.

FDI Limit in Banking Sector To Be Capped at 49 Percent

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.