RBI Issued Final Guidelines for New Bank Licenses

Reserve Bank of India (RBI) Issued Final Guidelines for New Bank Licenses in Private Sector.

The Reserve Bank of India (RBI), the central banking authority of India, on February 22, 2013 issued the final guidelines for new bank licenses, allowing any type of company to apply for a permit, paving the way for new banks after nine years.


Reserve Bank of India (RBI) said it would allow applications till July 1, 2013. No specific industry was barred from applying, although draft rules issued in August 2011 had barred real estate companies and brokerages.

The players which are expected throw their hat in the ring to get banking licenses are: L&T Finance Holdings, Tata Capital, Aditya Birla Financial Services, Reliance Capital, LIC Housing Finance, Mahindra & Mahindra Financial Services, Religare Enterprises, and Indiabulls.

The guidelines come three years after the then Finance Minister Shri Pranab Mukherjee announced that the RBI is considering giving some additional banking licenses to private sector players.

The last time that the central bank gave banking licenses was a decade ago when Kotak Mahindra Finance Ltd got converted into a commercial bank and YES Bank was floated.

Abstracts of Final Guidelines for new bank licenses issued by RBI:
Everyone is welcome, but with caveats:

• Corporates, non-banking finance companies (NBFCs) and public sector entities can set up banks. Broking and real estate companies can also apply.
• Promoters need to be financially sound with track record of 10 years.
• Positive feedback from other regulators and investigative agencies critical.

Ring fenced structure:

• Promoters must set up banks through wholly-owned non-operative financial holding companies.
• Holding company and bank not permitted to lend or invest in any entity belonging to the promoter group.
• Shares of holding companies cannot be transferred to entities outside the promoter group.

Shareholding in the bank:

• Holding company to hold 40% stake in bank for 5 years.
• Holding company to reduce stake in the bank to 20% in 10 years, 15% in 12 years.
• Foreign shareholding capped at 49% for 5 years.

Capital requirements:

• Minimum paid-up capital of the bank must be Rs 500 crore.
• The bank needs to maintain capital adequacy ratio at 13% for initial 3 years.
• The bank must get listed within 3 years.

Other conditions:

• At least 25% of new branches must be in unbanked rural centres.
• At least 50% of the directors of holding company must be independent directors.
• The bank’s board must have a majority of independent directors.

Application process:

• Applications for banking licenses need to be submitted by July 1, 2013.
• RBI to issue in-principle approval after considering recommendations from a high level advisory committee.
• The in-principle approval will be valid for 1 year.

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