HEADLINES:
July 08 2020
A cautious approach to new banks
04 September 2011

The Reserve Bank of India took one step forward in what has been a long drawn-out process of issuing licences for new banks in the private sector. The draft guidelines, which have been put up on the central bank's website, spell out the eligibility criteria, the organisational structure to be adopted by the new banks, the minimum capital requirements, corporate governance standards, the business model and related issues.

The issue of giving licences to a few private parties to start commercial banks has always been a sensitive one. More so, at this juncture, when it is believed that the new policy relaxation is primarily for the benefit of large industrial houses and business groups.

Before 1969, many leading banks, including Bank of India, Bank of Baroda and United Commercial Bank, were owned or controlled by leading business groups. In a two-stage process that began in 1969, the government nationalised these banks in a decision that had as much to do with domestic politics as economics. The case for the takeover was built on the ground that these banks were serving their private promoters' interests and that in any case there was a need to reorient the banking system towards national interests (a period of social control of banks preceded their takeover).

The bias against large industrial houses has continued in the reform era. Following the guidelines of 1993 and 2001, some private banks came into being but none of them was sponsored by large business houses.

However, this time it is likely that a few industrial houses will make the grade. The RBI discussion paper, which had considered the pros and cons of such a move, received wide ranging feedback. Even at the draft stage, the RBI has laid down stringent conditions.

Tough conditions

1. 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 ten years will be eligible to promote banks.

In a significant move, the RBI has barred groups having even an exposure of 10 per cent (by way of assets or income or both) in real estate and/or broking activities over the past three years. Evidently, these sectors are ‘speculative' in nature and the business model adopted in such businesses will be ‘misaligned' with that required by a bank.

2. Corporate structure: New banks will be set only through a wholly-owned non-operative holding company (NOHC), which will be registered with the RBI as a non-banking finance company. All financial activities of the promoter group will come under the NOHC. The idea is to ring fence the financial interests of the group from its other business activities and give a measure of protection to the bank's depositors.

3. The minimum capital requirement will be Rs.500 crore. The NOHC will hold a minimum 40 per cent of the capital for five years from the date of licensing. The aggregate non-resident shareholding will not exceed 49 per cent for the first five years.

4. Corporate governance: At least 50 per cent of the directors of the NOHC should be independent directors.

5. The business model should be realistic and viable and should address how the bank proposes to achieve financial inclusion. The bank should have a fourth of its branches in unbanked rural areas. The RBI will have the powers to vet the business plan and pull up the promoters for any deviations.

6. Amendments to the Banking Regulation Act, 1949, will be carried out to give the central bank extensive powers in a wide range of matters necessary for effective supervision. The bank shall get its shares listed on the stock exchanges within two years of licensing.

 

 

Related Stories