Realty, brokerage firms out; differential treatment to newcomers, incumbents.
The Reserve Bank of India (RBI) on Monday 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 licences. The central bank is considering issuing banking licences 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.
The new banks can be set up only through a wholly owned, non-operative 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.
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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 licences.
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.
Some, however, 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.
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 licences 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.
"Banking being a highly leveraged business, licences 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 licences to all the applicants meeting the eligibility criteria," the draft norms said.
| THE FINE PRINT |
| COMPANIES WELCOME, BUT WITH CAVEATS |
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| FINANCIAL INCLUSION |
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| CHECKS AND BALANCES |
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| HOLDING COMPANY |
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| THE ONES LEFT OUT |
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| DIFFERENTIAL TREATMENT |
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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 corporates it wants in the sector and only serious and long-term players can be considered," said Viren H Mehta, director at Ernst & Young.
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," said Monish Shah, director at Deloitte.
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 centres. The banks should also operate on the core banking solution platform from the beginning.
The non-banking finance companies seeking a banking licence 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.