[The
following guest post is contributed by Aditya
Sood, who is a 4th year BA, LLB (Hons) student at the West
Bengal National University of Juridical Sciences, Kolkata]
following guest post is contributed by Aditya
Sood, who is a 4th year BA, LLB (Hons) student at the West
Bengal National University of Juridical Sciences, Kolkata]
The Reserve Bank of India (RBI) on May 5, 2016
released Draft Guidelines for on-tap licensing of universal banks in private
sector in India (“Draft Guidelines”).[1] The Draft Guidelines, if
accepted, would mark a significant shift from the current “stop and go” policy
of licensing of banks undertaken by RBI.[2] The guidelines envisage a
“continuous authorization” policy with a view to “increase the level of
competition” and “bring new ideas in the system”. This post looks at some of
the key provisions of the Draft Guidelines and the issues that need to be
addressed before these guidelines are accepted.
released Draft Guidelines for on-tap licensing of universal banks in private
sector in India (“Draft Guidelines”).[1] The Draft Guidelines, if
accepted, would mark a significant shift from the current “stop and go” policy
of licensing of banks undertaken by RBI.[2] The guidelines envisage a
“continuous authorization” policy with a view to “increase the level of
competition” and “bring new ideas in the system”. This post looks at some of
the key provisions of the Draft Guidelines and the issues that need to be
addressed before these guidelines are accepted.
1. Eligible Promoters
Under the Draft Guidelines, the following
entities have been prescribed as eligible promoters: (i) existing non-banking
finance companies (NBFCs) controlled by residents,[3] (ii) individuals or
professionals who are residents and (iii) entities or groups in private sector
owned and controlled by residents.
entities have been prescribed as eligible promoters: (i) existing non-banking
finance companies (NBFCs) controlled by residents,[3] (ii) individuals or
professionals who are residents and (iii) entities or groups in private sector
owned and controlled by residents.
However, the Draft Guidelines specifically
prohibit large industrial houses, which have diversified businesses, from being
promoters of banks. These large industrial houses are defined in the Draft
Guidelines as groups that have assets of Rs. 50 billion or more and the
non-financial business of the group accounts for 40 per cent or more in terms
of total assets or gross income. But these large industrial houses are
permitted to hold up to 10 per cent equity in private banks through Individuals
or companies connected with such large industrial houses. This limit of a
maximum 10 per cent share will apply to individuals and all inter-connected
companies belonging to the large industrial house on an aggregate basis. The
objective of this provision is to prevent control of public money by large
industrial or business groups that have diversified operations.
prohibit large industrial houses, which have diversified businesses, from being
promoters of banks. These large industrial houses are defined in the Draft
Guidelines as groups that have assets of Rs. 50 billion or more and the
non-financial business of the group accounts for 40 per cent or more in terms
of total assets or gross income. But these large industrial houses are
permitted to hold up to 10 per cent equity in private banks through Individuals
or companies connected with such large industrial houses. This limit of a
maximum 10 per cent share will apply to individuals and all inter-connected
companies belonging to the large industrial house on an aggregate basis. The
objective of this provision is to prevent control of public money by large
industrial or business groups that have diversified operations.
The promoters (whether individuals or entities)
will have to fulfill the “fit and proper” criteria laid down by the RBI i.e.
(i) minimum 10 years of experience in banking and finance (for individuals) or 10
years of experience in running their businesses (for entities and NBFCs), (ii)
sound credentials and (iii) financial soundness and a successful track-record
for at least 10 years.
will have to fulfill the “fit and proper” criteria laid down by the RBI i.e.
(i) minimum 10 years of experience in banking and finance (for individuals) or 10
years of experience in running their businesses (for entities and NBFCs), (ii)
sound credentials and (iii) financial soundness and a successful track-record
for at least 10 years.
2. Corporate Structure
The 2013 Guidelines for licensing of new banks
(“2013 Guidelines”) mandated a Non
Operative Financial Holding Company (“NOFHC”)
model of corporate structure for a private sector bank. The basic objective of
a NOFHC model is that the Holding Company should ring fence the financial
activities (including the banking activities) of the promoter group from other
activities not regulated by the financial regulators. The Draft Guidelines make
a departure from the 2013 Guidelines by making the NOFHC model optional for
individual promoters and standalone promoting or converting entities that do
not have other group entities. Such promoters have been given the option of
setting up or converting into a banking company under the Companies Act, 2013. However,
for individuals or entities that have other group entities, the bank shall be
set up only under the NOFHC model.
(“2013 Guidelines”) mandated a Non
Operative Financial Holding Company (“NOFHC”)
model of corporate structure for a private sector bank. The basic objective of
a NOFHC model is that the Holding Company should ring fence the financial
activities (including the banking activities) of the promoter group from other
activities not regulated by the financial regulators. The Draft Guidelines make
a departure from the 2013 Guidelines by making the NOFHC model optional for
individual promoters and standalone promoting or converting entities that do
not have other group entities. Such promoters have been given the option of
setting up or converting into a banking company under the Companies Act, 2013. However,
for individuals or entities that have other group entities, the bank shall be
set up only under the NOFHC model.
Corporate
Structure of the NOFHC
Structure of the NOFHC
The NOFHC has to be registered as a NBFC with
the RBI. The minimum shareholding of promoters in the NOFHC has been fixed at
51 per cent of the total equity, which is lower than a wholly promoter-owned
NOFHC under the 2013 Guidelines. This shows that RBI has permitted
diversification of shareholding in the NOFHC. The Draft Guidelines prescribe
the eligible shareholders of the NOFHC as, non-financial services companies,
entities and NOFHCs, core investment companies, investment companies in the
Group and individuals belonging to the Promoter Group. The shareholding of
individuals belonging to the Promoter Group has been fixed at 15 per cent of
the equity capital and shareholding by a single non-promoter individual shall
not exceed 10 per cent of the equity capital.[4]
the RBI. The minimum shareholding of promoters in the NOFHC has been fixed at
51 per cent of the total equity, which is lower than a wholly promoter-owned
NOFHC under the 2013 Guidelines. This shows that RBI has permitted
diversification of shareholding in the NOFHC. The Draft Guidelines prescribe
the eligible shareholders of the NOFHC as, non-financial services companies,
entities and NOFHCs, core investment companies, investment companies in the
Group and individuals belonging to the Promoter Group. The shareholding of
individuals belonging to the Promoter Group has been fixed at 15 per cent of
the equity capital and shareholding by a single non-promoter individual shall
not exceed 10 per cent of the equity capital.[4]
The Draft Guidelines state that only those
regulated financial sector entities in which the individual promoter or Group
has significant control will be held under the NOFHC. The determination of
significant control will be done as per Accounting Standards AS 21 and AS 23.
regulated financial sector entities in which the individual promoter or Group
has significant control will be held under the NOFHC. The determination of
significant control will be done as per Accounting Standards AS 21 and AS 23.
As per RBI’s mandate, there are certain
activities such as, insurance, stock broking, mutual funds etc., which have to
be conducted through a separate financial entity (other than the bank) under
the NOFHC.[5] This separate entity could
be a subsidiary, joint venture or an associate structure of the NOFHC. These
entities are permitted to undertake only those activities that the bank is
allowed to undertake under Section 6 (a) to (o) of the Banking Regulation Act,
1949.
activities such as, insurance, stock broking, mutual funds etc., which have to
be conducted through a separate financial entity (other than the bank) under
the NOFHC.[5] This separate entity could
be a subsidiary, joint venture or an associate structure of the NOFHC. These
entities are permitted to undertake only those activities that the bank is
allowed to undertake under Section 6 (a) to (o) of the Banking Regulation Act,
1949.
3. Minimum Capital requirement and Capital
Adequacy Ratio (“CAR”)
Adequacy Ratio (“CAR”)
The Draft Guidelines state that the initial
minimum paid-up equity of the bank shall be Rs. 500 crore. The 2013 Guidelines
also prescribed Rs. 500 crore as the minimum capital requirement for banks.
minimum paid-up equity of the bank shall be Rs. 500 crore. The 2013 Guidelines
also prescribed Rs. 500 crore as the minimum capital requirement for banks.
The initial minimum share of the promoters in
the bank has been set at 40 per cent of the equity and if it is higher than 40
per cent then it has to be brought down to 40 per cent within 5 years of
commencement of operations. The promoters’ share will remain locked-in for a
period of 5 years from the commencement of operations. The Draft Guidelines
provide for a gradual dilution of the promoter shareholding in the bank. The
promoter share shall be brought down to 30 per cent of the equity within 10
years and to 15 per cent within a period of 12 years from date of commencement
of business.
the bank has been set at 40 per cent of the equity and if it is higher than 40
per cent then it has to be brought down to 40 per cent within 5 years of
commencement of operations. The promoters’ share will remain locked-in for a
period of 5 years from the commencement of operations. The Draft Guidelines
provide for a gradual dilution of the promoter shareholding in the bank. The
promoter share shall be brought down to 30 per cent of the equity within 10
years and to 15 per cent within a period of 12 years from date of commencement
of business.
The Draft Guidelines also mandate the banks to
maintain a minimum CAR of 13 per cent of the risk weighted assets (“RWA”) which is higher than the current
CAR of 9 per cent of RWA for existing Scheduled Commercial Banks (“SCBs”).[6] The bank shall also list
its securities on a stock exchange within 6 years of commencement of business.
maintain a minimum CAR of 13 per cent of the risk weighted assets (“RWA”) which is higher than the current
CAR of 9 per cent of RWA for existing Scheduled Commercial Banks (“SCBs”).[6] The bank shall also list
its securities on a stock exchange within 6 years of commencement of business.
4. Foreign Shareholding of Banks
As per the Draft Guidelines, foreign
shareholding in banks will be determined by the existing FDI policy. Presently,
the Consolidated FDI Policy, 2015 prescribes for a maximum of 74 per cent of
FDI in banking industry (up to 49 per cent through automatic route and after 49
per cent though approval of the Government).[7] Individual share of
Foreign Institutional Investors (“FIIs”)
or Foreign Portfolio Investors (“FPIs”)
has been fixed at below 10 per cent of the paid up capital of the bank.
Aggregate share of FIIs, FPIs and Qualified Institutional Investors (“QFIs”) cannot exceed 24 per cent of the
total paid up capital of the bank and this limit can be raised up to 49 per
cent through a resolution by the Bank’s Board of Directors followed by a
special resolution to that effect by its General Body.[8]
shareholding in banks will be determined by the existing FDI policy. Presently,
the Consolidated FDI Policy, 2015 prescribes for a maximum of 74 per cent of
FDI in banking industry (up to 49 per cent through automatic route and after 49
per cent though approval of the Government).[7] Individual share of
Foreign Institutional Investors (“FIIs”)
or Foreign Portfolio Investors (“FPIs”)
has been fixed at below 10 per cent of the paid up capital of the bank.
Aggregate share of FIIs, FPIs and Qualified Institutional Investors (“QFIs”) cannot exceed 24 per cent of the
total paid up capital of the bank and this limit can be raised up to 49 per
cent through a resolution by the Bank’s Board of Directors followed by a
special resolution to that effect by its General Body.[8]
5. Prudential and Exposure Norms
For a corporate structure without NOFHC, the
prudential norms governing the new universal banks will be the existing norms on
income recognition, asset
classification and provisioning pertaining to advances, as specified by
the RBI. The banks are also prohibited
from having any exposure to its promoters who have a shareholding greater than
10 per cent of the equity capital. The exposure norms will be the existing
permissible exposures allowed by the RBI.
prudential norms governing the new universal banks will be the existing norms on
income recognition, asset
classification and provisioning pertaining to advances, as specified by
the RBI. The banks are also prohibited
from having any exposure to its promoters who have a shareholding greater than
10 per cent of the equity capital. The exposure norms will be the existing
permissible exposures allowed by the RBI.
For a bank with a NOFHC structure, the
prudential and exposure norms are same as prescribed in the 2013 guidelines in
paragraphs 2 (G), (H) and (I). The earlier guidelines state that prudential
norms will be applicable to the NOFHC both on a stand-alone and a consolidated
basis and the norms will be on similar lines with the bank. The NOFHC and the
bank are precluded from having any exposures to the Promoter Group and the
banks are prohibited from investing in the equity or debt capital instruments
of any financial entities held by the NOFHC.
prudential and exposure norms are same as prescribed in the 2013 guidelines in
paragraphs 2 (G), (H) and (I). The earlier guidelines state that prudential
norms will be applicable to the NOFHC both on a stand-alone and a consolidated
basis and the norms will be on similar lines with the bank. The NOFHC and the
bank are precluded from having any exposures to the Promoter Group and the
banks are prohibited from investing in the equity or debt capital instruments
of any financial entities held by the NOFHC.
6. Other conditions
The applicants are required to submit a
realistic and viable business plan along with their applications. It should
state how the bank proposes to achieve the financial inclusion and should
consist of a project report containing details about various aspects provided
in Annexure II of the Draft Guidelines.
realistic and viable business plan along with their applications. It should
state how the bank proposes to achieve the financial inclusion and should
consist of a project report containing details about various aspects provided
in Annexure II of the Draft Guidelines.
Further, the banks are required to comply with
the priority sector lending targets as applicable to domestic banks. The
present rate for priority sector lending is 40 per cent of the Adjusted Net
Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure,
whichever is higher for domestic scheduled banks.
the priority sector lending targets as applicable to domestic banks. The
present rate for priority sector lending is 40 per cent of the Adjusted Net
Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure,
whichever is higher for domestic scheduled banks.
The Draft Guidelines also mandate the banks to
open at least 25 per cent of its branches in unbanked rural areas.
open at least 25 per cent of its branches in unbanked rural areas.
7. Issues that need to be addressed
First, the
Draft Guidelines nowhere provide for a time limit within which the application
has to be accepted or rejected by the RBI. The RBI also does not need to
provide any reasons for the rejection of application. There should be some
provision in the Draft Guidelines to limit the time period for assessment of
applications.
Draft Guidelines nowhere provide for a time limit within which the application
has to be accepted or rejected by the RBI. The RBI also does not need to
provide any reasons for the rejection of application. There should be some
provision in the Draft Guidelines to limit the time period for assessment of
applications.
Second,
the
Draft Guidelines in paragraph 2(I)(xiii) state that
the
Draft Guidelines in paragraph 2(I)(xiii) state that
“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. Therefore,
it may not be possible for RBI to issue licences to all the applicants just
meeting the eligibility criteria prescribed above”
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. Therefore,
it may not be possible for RBI to issue licences to all the applicants just
meeting the eligibility criteria prescribed above”
This basically implies that even though
theoretically RBI is shifting to on-tap licensing, however it will still have
the final discretion to grant or reject a license even though an applicant
fulfills all the criteria mentioned above. This provision defeats the purpose
of on-tap licensing and makes it discretion based instead of being rule based.
theoretically RBI is shifting to on-tap licensing, however it will still have
the final discretion to grant or reject a license even though an applicant
fulfills all the criteria mentioned above. This provision defeats the purpose
of on-tap licensing and makes it discretion based instead of being rule based.
The RBI has invited comments on the Draft
Guidelines till June 30, 2016 and if the above issues are addressed, it would
help in fulfilling the objective for which these guidelines were introduced.
Guidelines till June 30, 2016 and if the above issues are addressed, it would
help in fulfilling the objective for which these guidelines were introduced.
– Aditya Sood
[1] Draft Guidelines available at https://m.rbi.org.in/scripts/bs_viewcontent.aspx?Id=3168.
[2] According to the current policy, the RBI
opens application for licenses of banks once in a decade and grants licenses to
suitable applicants. The most recent round of granting licenses happened in
2013 where RBI granted licenses to IDFC Bank and Bandhan Financial Services.
opens application for licenses of banks once in a decade and grants licenses to
suitable applicants. The most recent round of granting licenses happened in
2013 where RBI granted licenses to IDFC Bank and Bandhan Financial Services.
[3] As defined in the relevant Foreign Exchange
Management Regulations.
Management Regulations.
[4] Here individuals include their relatives
as defined under Section 2(77) of the Companies Act, 2013 and other entities
where individual and/or his relatives hold not less than 50 per cent of the
voting equity shares.
as defined under Section 2(77) of the Companies Act, 2013 and other entities
where individual and/or his relatives hold not less than 50 per cent of the
voting equity shares.
[5] See RBI FAQs on Guidelines for Licensing of New Banks in the Private Sector,
Question 86, available at https://www.rbi.org.in/scripts/FAQView.aspx?Id=94.
Question 86, available at https://www.rbi.org.in/scripts/FAQView.aspx?Id=94.
[6] Master Circular on Prudential Norms on
Capital Adequacy (UCBs), published on July 1, 2015 available at https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9816#4.
Capital Adequacy (UCBs), published on July 1, 2015 available at https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9816#4.
[7] Department of Industrial Policy and
Promotion, Consolidated FDI Policy, 2015,
at 68.
Promotion, Consolidated FDI Policy, 2015,
at 68.
[8] Id.
