RBI Guidelines for Licensing of New Private Sector Banks

The
Reserve Bank of India (RBI) has issued a final set of guidelines
for licensing of new banks in the private sector. These guidelines will becomes
operational with effect from July 1, 2013 and applications under them for
establishing new banks must be submitted to the RBI before that date.
These
guidelines are based on the draft
issued by the RBI in August 2011. Since then, the RBI has received and
considered comments on the draft. Moreover, the Banking Regulation Act, 1949
underwent amendments in December 2012, which were a precondition to the
effectiveness of the new regime.
The
new guidelines lay down an enabling but strict regime for the private sector to
apply for the establishment of banks. The broad structure and conditions of the
new regime remain broadly similar to those indicated in the draft, and hence
the analysis
contained in our post of August 2011 largely holds good.
A
principal change from the draft is that real estate and stock broking companies
are no longer prevented at the outset from making applications to set up banks.
The risks arising from these types of entities will be determined by the RBI
subjectively while exercising its discretion in approving licenses for new
banks. Moreover, by requiring promoter groups to set up banks through a
non-operative financial holding company (NOFHC), the intention is to ring-fence
the banking and financial activities of the group from other activities.
Other
conditions, including those relating to minimum capitalization, foreign
investment, priority sector lending and corporate governance are detailed in
the guidelines, which are summarized here.

This
is certainly likely to create a significant amount of interest among the
business groups in India to foray into the banking sector, which might trigger
a flood of applications. However, it is likely that only a few licences will in
fact be granted in the near future, which may not necessarily cause a radical
change in the industry, but would lead to some gradual progression in greater access
to banking services and competition.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • It is recalled, PC, the FM in his initial public announcement of such a proposal indicated to the effect that the novel idea should enable the realty sector to have its financing needs met by an exclusive wing of banking sector, divorced from the extant banking system. Be that as it may, the RBI’s follow-up move, if properly designed, implemented and gone ahead, with a sincerity of its laudable purpose, in a common man’s perspective, should help the PSBCs in being insulated to a great extent from the worrisome ‘risks’ and the resultant ‘NPAs’ thus far faced by them.
    No need to specially say, – Over to concerned experts,hoping for matured thoughts and useful suggestions.

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