RBI's draft norms for on-tap bank licences may upset big business houses

Mumbai - The Reserve Bank of India (RBI) has issued proposals for the relaxation of requirements for banking licences in the latest effort to boost a sector struggling with $100 billion of stressed debt that is choking the financial system and hitting economic growth. With only about half of India’s population having access to financial services, particularly in rural areas, the RBI is keen to extend the sector’s reach and the new proposals aim to encourage investment in new lenders. [caption id=“attachment_2767792” align=“alignleft” width=“380”]  Reuters[/caption] The draft guidelines announced on Thursday include a move to allow large industrial companies to buy up to 10 percent stakes in new lenders. The proposal may upset the plans of several business houses who had lost out in the last round of distribution of universal bank licences and were eagerly waiting for on-tap regime to set up their own banks. The central bank also proposed a lowering of the minimum ownership level for companies or people setting up lenders under a financial holding structure to 51 percent from 100 percent. The RBI emphasised, however, that it would remain cautious when granting licences. “Banking being a highly leveraged business, licences shall be issued on a very selective basis to those who conform to the above 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,” the RBI said. In a departure from the earlier norms on universal banks, the draft guidelines have made resident individuals and professionals having 10 years of experience in banking and finance as eligible for promoting universal banks. “The initial minimum paid-up voting equity capital for a new bank shall be Rs 500 crore and thereafter, the bank shall have a minimum net worth of Rs 500 crore at all times,” the central bank said. While assuming charge on 4 September, 2013, Governor Raghuram Rajan had said one of his key reform measures would to put bank licensing on-tap. He fulfilled a part of it in April 2014 by issuing in-principal approvals to two-infra lender IDFC and microfinancier Bandhan, out of 25 applicants. Both of them are operational since last year. These banks came in after a gap of over a decade. Rajan took the second step by announcing in-principle nod to 10 payments banks and 11 small finance banks last year. At the last monetary policy in April, Rajan had said he would look at more differentiated banks like custodian banks and wholesale banks. The RBI said interested parties will have to float a non-operative financial holding company (NOFHC), which has now been made non-mandatory in case of promoters being individuals or standalone promoting/ converting entities who/ which do not have other group entities. The NOFHC is now required to be owned by the promoter or promoter group to the extent of at least 51 percent of the total paid-up equity capital of the NOFHC, instead being wholly-owned by the promoter group, which was a necessity in the previous guidelines. Existing non-banking financial companies (NBFCs) that are ‘controlled by residents’ and have a successful track record for at least 10 years will be eligible for the licence. “Entities or groups in the private sector that are ‘owned and controlled by residents’ and have a successful track record for at least 10 years, provided that if such entity or group has total assets of Rs 5,000 crore or more, the non-financial business of the group does not account for 40 per cent or more in terms of total assets or in terms of gross income,” the guidelines said. The foreign shareholding will be as per the existing foreign direct investment (FDI) policy, which is currently at 74 percent. The RBI has invited suggestions and comments on the draft guidelines by June 30. “The final guidelines will be issued and the process of inviting applications for setting up of new universal banks in the private sector will be initiated after receiving feedback, comments and suggestions on draft guidelines,” the central bank said. The applications will be referred to a standing external advisory committee to be set up by the Reserve Bank. The committee will submit its recommendations to the apex bank for consideration and the decision to issue an in-principle approval for setting up of a bank will be taken by the RBI. Those winning applicants will have 18 months to operationalise the new banks.