Rs 500 crore minimum capital for new private sector banks

The Reserve Bank of India has announced the draft guidelines for new banking licenses.

The criteria include:

Promoters / promoter groups with diversified ownership, sound credentials and integrity, with a successful track record for at least 10 years in running their businesses will be eligible to promote banks.

The initial minimum paid-up capital for a new bank will be Rs 500 crore.

Entities / groups having significant (10 per cent or more) income or assets or both from real estate construction and/or broking activities individually or taken together in the last three years will not be eligible.

New banks can only be set up through a wholly owned Non-Operative Holding Company (NOHC) to be registered with the Reserve Bank as a non-banking finance company (NBFC), which will hold the bank as well as all the other financial companies in the promoter group.

More from Business

Hyundai India’s Rs 27,870 crore IPO oversubscribed by 2.28X, largely driven by institutional investors How Indian fintech startups are driving Malaysia’s UPI-like digital payments revolution

The aggregate non-resident shareholding from FDI (foreign direct investment), NRIs (non-resident Indians) and FIIs (foreign institutional investors) in the new private sector banks shall not exceed 49 percent for the first five years from the date of licensing of the bank. No non-resident shareholder, directly or indirectly, individually or in groups, will be permitted to hold 5 percent or more of the paid up capital of the bank. After the expiry of 5 years from the date of licensing of the bank, the foreign shareholding would be as per the extant policy. Currently, foreign shareholding in private sector banks is allowed up to a ceiling of 74 percent of the paid up capital.

The Reserve Bank has announced its new draft licensing norms for private sector promoters to set up new banks. The norms require promoters to bring in a minimum capital of Rs 500 crore and limit foreign holdings to 49 percent.

Impact Shorts

More Shorts

Tata Harrier EV vs Mahindra XEV 9e: Design and road presence compared

As Trump weaponises tariff, Fed sees a bigger worry: Not jobs, but rising prices in America

Reactions to the draft guidelines:

Overall, the norms seem to have received a positive reception. V Vaidyanathan of Future Capital told CNBC that the Rs 500 crore minimum capital requirement is “probably a bit on the lower side, but overall, all the other norms are good.”

However, there seems to be some confusion about what the term “diversified ownership” means. In the past, the definition of ‘diversified’ has meant “one single entity not holding more than 10 percent,” said Latha Venkatesan, banking editor of CNBC. There is also some surprise about the fact that broking firms have been excluded from setting up banks. But the exclusion of real estate companies comes as no surprise, said experts.

The following is the full text of the RBI press release:

“The Reserve Bank of India released on its website today, the Draft Guidelines for “Licensing of New Banks in the Private Sector”. The Reserve Bank has sought views/comments on the draft guidelines from banks, non-banking financial institutions, industrial houses, other institutions and the public at large. Suggestions and comments on the draft guidelines may be sent by October 31, 2011 to the Chief General Manager, Reserve Bank of India, Department of Banking Operations and Development, Central Office, 13h floor, Central Office Building, Shahid Bhagat Singh Marg, Mumbai-400001 or emailed.

Final guidelines will be issued and the process of inviting applications for setting up of new banks in the private sector will be initiated. After receiving feedback, comments and suggestions on the draft guidelines, and after certain vital amendments to Banking Regulation Act, 1949 are in place.

[caption id=“attachment_72339” align=“alignleft” width=“380” caption=“Reserve Bank of India. AFP”]  [/caption]

Key features of the draft guidelines are:

(i) Eligible promoters: Entities / groups in the private sector, owned and controlled by residents, with diversified ownership, sound credentials and integrity and having successful track record of at least 10 years will be eligible to promote banks. Entities / groups having significant (10 per cent or more) income or assets or both from real estate construction and / or broking activities individually or taken together in the last three years will not be eligible.

(ii) Corporate structure: New banks will be set up only through a wholly owned Non-Operative Holding Company (NOHC) to be registered with the Reserve Bank as a non-banking finance company (NBFC) which will hold the bank as well as all the other financial companies in the promoter group.

(iii) Minimum capital requirement: Minimum capital requirement will be Rs 500 crore. Subject to this, actual capital to be brought in will depend on the business plan of the promoters. NOHC shall hold minimum 40 per cent of the paid-up capital of the bank for a period of five years from the date of licensing of the bank. Shareholding by NOHC in excess of 40 per cent shall be brought down to 20 per cent within 10 years and to 15 per cent within 12 years from the date of licensing of the bank.

(iv) Foreign shareholding: The aggregate non-resident shareholding in the new bank shall not exceed 49 per cent for the first 5 years after which it will be as per the extant policy.

(v) Corporate governance: At least 50 per cent of the directors of the NOHC should be independent directors. The corporate structure should be such that it does not impede effective supervision of the bank and the NOHC on a consolidated basis by the Reserve Bank.

(vi) Business model: Should be realistic and viable and should address how the bank proposes to achieve financial inclusion.

(vii) Other conditions:

• The exposure of bank to any entity in the promoter group shall not exceed 10 per cent and the aggregate exposure to all the entities in the group shall not exceed 20 per cent of the paid-up capital and reserves of the bank.

• The bank shall get its shares listed on the stock exchanges within two years of licensing.

• The bank shall open at least 25 per cent of its branches in unbanked rural centres (population upto 9,999 as per 2001 census)

• Existing NBFCs, if considered eligible, may be permitted to either promote a new bank or convert themselves into banks.

(viii) In respect of promoter groups having 40 per cent or more assets / income from non-financial business, certain additional requirements have been stipulated.

Background

It may be recalled that pursuant to the announcement made by the Union Finance Minister in his budget speech and the Reserve Bank’s Annual Policy Statement for the year 2010-11, a discussion paper on “Entry of New Banks in the Private Sector” was placed on RBI website on August 11, 2010. The discussion paper marshalled international practices, Indian experience as well as the extant ownership and governance (O&G) guidelines. The Reserve Bank had sought views/comments from banks, non-banking financial institutions, industrial houses, other institutions and the public at large. Discussions were also held with major stakeholders to seek their comments and suggestions on the issues raised in the paper. The gist of comments on various issues received through email and letters and discussions was placed on Reserve Bank’s website on December 23, 2010. The draft guidelines have been prepared based on the responses received, extensive internal discussions and consultation with the Government of India.