Mumbai, Feb. 22: The RBI today allowed a wider category of entities to enter banking, including corporate houses and PSUs as well as those engaged in real estate and broking, but introduced stringent checks and balances such as “vetting” the existing business model of the promoters, stipulating a holding company structure and barring loans to other group entities.
Only those promoters will be considered whose businesses are not speculative in nature or not subject to high asset price volatility, the RBI said.
In its much-awaited final guidelines on the entry of new private banks released today, the apex bank did away with a norm in its draft proposal that placed curbs on real estate and broking firms. The draft guidelines had barred entities that earned more than 10 per cent of their income from real estate or broking.
The RBI, therefore, agreed to a suggestion of the finance ministry to allow eligible corporate entities. Moreover, public sector units have also become eligible. The draft guidelines did not mention PSUs.
However, the central bank will closely monitor the business model of the promoters. The business model must not be “misaligned’’ with the banking mode and “their (promoter/group) business should not potentially put the bank and the banking system at risk on account of group activities such as those which are speculative in nature or subject to high asset price volatility’’.
Experts said the RBI was indicating that licences would be given to quality promoters who have stable business models and clean track records, though it did not exclude any particular sector.
“The RBI is perhaps saying that not just anybody and everybody can set up a bank. The interested entities should make an assessment of their own business, profit, track record and more importantly the willingness to fulfil the requirements set by the RBI,” says Shinjini Kumar, director, PwC India.
In its final guidelines, the RBI retained the stipulation that the initial minimum paid-up voting equity capital should be Rs 500 crore. It also retained the earlier suggestion that only financially sound promoters/groups with a successful track record of at least 10 years can submit applications for a licence.
Interested parties will be allowed to bank only through a wholly owned non-operative financial holding company (NOFHC).
The holding company will hold stakes in the bank and all the other financial services entities of the group. The NOFHC will ensure ring-fencing of the financial services entities of the group, including the bank, from other activities of the group.
The holding company must hold a minimum of 40 per cent of the paid-up voting equity capital of the bank to be locked for five years.
If the shareholding exceeds 40 per cent, it should be brought down to 40 per cent within three years. Earlier, the apex bank’s draft guidelines gave the holding company two years.
Moreover, the holding company will bring down its stake to 20 per cent in 10 years, and 15 per cent in 12 years. In another relaxation, banks can get listed on stock exchanges in three years against the two years proposed in the draft.
The RBI did, however, tighten requirements with regard to exposure in promoter group companies.
The holding company and the bank must not have any credit and investment (including investments in equity/debt capital instrument) exposure to any entity belonging to the promoter group. The draft guidelines had said the exposure should not be more than 10 per cent.
Finally, the new entities should open 25 per cent of their branches in unbanked rural areas and must comply with existing priority sector norms.
The RBI will take applications for new banks till July 1. It clarified that since banking is a highly leveraged business, licences shall be issued on a very selective basis to those who conform to its requirements and those 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 the RBI to issue licences to all the applicants meeting the eligibility criteria,” it added.
There will be a three stage selection process, starting with the RBI checking out prime-facie eligibilities of the applicants.
A high-level advisory committee, set up by the RBI itself, will then consider the applications.
The committee will give its views to the RBI, which will give its in-principle approval.