According to the RBI guidelines, released on Saturday, the promoters of these banks will have to pump in 40 per cent of the equity.
From the outset, the local area banks will require to achieve 8 per cent capital adequacy ratio. The income recognition, asset classification and provisioning norms of the apex bank will also be applicable from the beginning.
Proposals having diversified shareholdings will be preferred for floating the local area banks, the RBI release stated. The apex bank has imposed a cap on the voting rights of an individual shareholder at 10 per cent of the total voting rights, in accordance with Section 12 (2) of the Banking Regulations Act, 1949.
These banks will be registered as a public limited company under the Companies Act, 1956, and licensed under the Banking Regulation Act.
They will be eligible for inclusion in the second schedule of the RBI Act, 1934. However, in regard to liquidity requirements and interest rates, the local area banks will be governed by the provisions applicable to regional rural banks.
Like the RRBs, the local area banks will be subjected to 3 per cent CRR and 25 per cent SLR requirements.
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They will also require to lend 40 per cent of the net bank credit to the priority sector.
At least 25 per cent of the priority sector advances will have to be extended to the weaker sections of society.
The objective of these banks will be to cater to the credit needs of the local people and provide efficient and competitive financial intermediation. The RBI guidelines stipulate that these banks will have to confine operations to a maximum of three geographically-contiguous districts. The headquarters and the branches will have to located within the area of operations.
Finance minister P Chidambaram in his budget speech had announced the plan to promote private local area banks to mobilise rural savings.
He also proposed to set up state-level agricultural development financial institutions to promote investments in commercial or high-tech agriculture and allied activities like horticulture, floriculture and agro-processing.